The following questions are based on Cramden Corporation, which manufactures a product that gives rise to a by-product called Norton. The only costs associated with Norton are additional processing costs of $1 for each unit. Cramden accounts for Norton sales first by deducting its separable costs from such sales and then by deducting this net amount from the cost of sales of the major product. (This is Method 1 discussed in the text. See Illustration 8-10

, for example.) This year, 1,200 units of Norton were produced. They were all sold at $5 each.

a. Sales revenue and cost of goods sold from the main product were $400,000 and

$200,000, respectively, for the year. What was the gross margin after considering the by-product sales and costs (that is, the "gross margin" in Illustration 8-10

)?

(1) $200,000.

(2) $204,800.

(3) $195,200.

(4) $206,000.

b. If Cramden changes its method of accounting for Norton sales by showing the net amount as "other income," Cramden's gross margin would:

(1) Be unaffected.

(2) Increase by $4,800.

(3) Decrease by $4,800.

(4) Decrease by $6,000.

c. If Cramden changes its method of accounting as indicated in

(b) above, what would be the effects of the change on the company's profits?

(1) No effect.

(2) Increase by $4,800.

(3) Decrease by $4,800.

(4) Decrease by $6,000.