Watches Inc. produces and sells watches for $32.00 per unit. For the Year 1, Wat

Question

Watches Inc. produces and sells watches for $32.00 per unit. For the Year 1, Watches Inc. produced 56,400 units and sold 51,500 units. In Year 2, Watches Inc. produced 50,000 watches and sold 53,000 for the year. Other information for Years 1 and 2 includes:

Direct Material costs $10.00 per unit

Direct Labor costs $ 6.50 per unit

Variable Manufacturing costs $ 4.00 per unit

Variable Marketing costs $ 1.60 per unit

Fixed Manufacturing costs $211,500

Fixed Marketing costs $ 75,000

Year 1 Beginning inventory 0 units

Using Full (Absorption) Costing and the prepare an Absorption Format Income Statements resulting in Operating Income for Years 1 and Year 2 using the information above.

Explanation / Answer

Absorption costing Year 1 Year 2 Product cost Direct material 10.0 10.0 Direct labor 6.5 6.5 Variable manufacturing overhead 4.0 4.0 Fixed manufacturing (211500/56400) 3.75 4.2 Total product cost 24.25 24.7 Units produced 56400 50000 Units sold 51,500 53,000 Income statement 1st year 2nd year Sales revenue 1648000 1696000 cost of goods sold Beginning inventory 0 118825 cost of goods manufactured 1367700 1236500 Add Goods available for sale 1367700 1355325 Ending inventory 118825 46987 Less Cost of goods sold 1248875 1308338 Gross profit 399125 387662 Selling and admin expenses Less Variable selling and admin expense 82400 84800 Fixed marketing expense 75000 75000 Total Selling and admin expenses 157400 159800 Net operating income 241725 227862

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