Music World produces student-grade violins for beginning violin students. The company produced 2,100 violins in its first month of operations. At month-end, 550 finished violins remained unsold. There was no inventory in work in process. Violins were sold for $122.50
each. Total costs from the month are as follows:
Direct materials used............................................................................... $87,200
Direct labour........................................................................................... 60,000
Variable manufacturing overhead ........................................................... 25,000
Fixed manufacturing overhead................................................................ 44,100
Variable selling and administrative expenses........................................... 8,000
Fixed selling and administrative expenses................................................ 13,900
The company prepares traditional (absorption costing) income statements for its bankers.
Hannah would also like to prepare contribution margin income statements for her own management use. Compute the following amounts that would be shown on these income statements:
Requirements
1. Gross profit
2. contribution margin
3. Total expenses shown below the gross profit line
4. Total expenses shown below the contribution margin line
5. Dollar value of ending inventory under absorption costing
6. Dollar value of ending inventory under variable costing
Which income statement has a higher operating income? By how much? Explain.