Following is a traditional income statement for Mouse Max, a company that manufactures cordless mice for computers.

Question:

Revenue ................................... $2,500,000

Cost of goods sold ................... 1,220,000

Gross margin ........................... 1,280,000

Selling and administration .... 1,150,000

Operating income .................. $ 130,000

This income statement reflects sales of 100,000 mice. Direct materials cost $5.00 per mouse, direct labor was $1.00 per mouse, and sales commissions were $1.50 per mouse. Advertising costs totaled $200,000. All manufacturing overhead costs are fixed.

REQUIRED

A. Develop a variable cost income statement.

B. Why do traditional income statements have to conform to accounting rules such as GAAP and IFRS?

C. Managers sometimes divide cost of goods sold from a traditional income statement by the quantity of units sold to calculate an average production cost per unit. They then multiply the average cost per unit by an estimated future production volume to estimate incremental future costs. Why is this method likely to produce a poor-quality cost estimate?

GAAP
Generally Accepted Accounting Principles (GAAP) is the accounting standard adopted by the U.S. Securities and Exchange Commission (SEC). While the SEC previously stated that it intends to move from U.S. GAAP to the International Financial Reporting Standards (IFRS), the...