Maxwell Company manufactures and sells a single product. The following costs were incurred during the company's first year of operations:
Variable costs per unit:
Manufacturing:
Direct materials........................................................$18
Direct labor..............................................................$7
Variable manufacturing overhead....................................$2
Variable selling and administrative..................................$2
Fixed costs per year:
Fixed manufacturing overhead...............................$200,000
Fixed selling and administrative expenses..................$110,000
During the year, the company produced 20,000 units and sold 16,000 units. The selling price of the company's product is $50 per unit.
Required:
1. Assume that the company uses absorption costing:
a. Compute the unit product cost.
b. Prepare an income statement for the year.
2. Assume that the company uses variable costing:
a. Compute the unit product cost.
b. Prepare an income statement for the year.
3. The company's controller believes that the company should have set last year's selling price at $51 instead of $50 per unit. She estimates the company could have sold 15,000 units at a price of $51 per unit, thereby increasing the company's gross margin by $2,000 and its net operating income by $4,000. Assuming the controller's estimates are accurate, do you think the price increase would have been a good idea?