Far North Telecom, Ltd., of Ontario, has organized a new division to manufacture and sell specialty cellular telephones. The division’s monthly costs are shown below:

Far North Telecom regards all of its workers as full-time employees and the company has a long-standing no layoff policy. Furthermore, production is highly automated. Accordingly, the company includes its labor costs in its fixed manufacturing overhead. The cellular phones sell for $150 each. During September, the first month of operations, the following activity was recorded:

Required:

1.         Compute the unit product cost under:

 a.   Absorption costing.

 b.   Variable costing.

2.         Prepare an absorption costing income statement for September.

3.         Prepare a contribution format income statement for September using variable costing.

4.         Assume that the company must obtain additional financing in order to continue operations. As a member of top management, would you prefer to rely on the statement in (2) above or in (3) above when meeting with a group of prospective investors?

5.         Reconcile the absorption costing and variable costing net operating incomes in (2) and (3) above.

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Manufacturing costs: Variable costs per unit: Direct materials $48 $2 Variable manufacturing overhead $360,000 Fixed manufacturing overhead costs (total) Selling and administrative costs: Variable 12% of sales Fixed (total) $470,000