Variable and Absorption Costing Unit Product Costs and Income Statements

[LO1, LO2]

Maxwell Company manufactures and sells a single product. The following costs were incurred during the company’s first year of operations:

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?

Transcribed Image Text:

Variable selling and administrative Variable costs per unit: Manufacturing: Direct materials... Direct labor .... Variable manufacturing overhead Fixed costs per year: $18 $7 $2 $2 Fixed manufacturing overhead. $200,000 Fixed selling and administrative expenses ....... $110,000