5-B1 Contribution and Absorption Income Statements

The following information is taken from the records of the Zealand Manufacturing Company for the year ending December 31, 2012. There were no beginning or ending inventories.

Sales	$14,000,000	Long-term rent, factory	$ 85,000
Sales commissions	470,000
Advertising	430,000	Factory superintendents salary	31,000
Shipping expenses	320,000	Factory supervisors salaries	105,000
		Direct materials used	3,500,000
Administrative executive salaries	100,000	Direct labor	1,700,000
		Cutting bits used	53,000
Administrative clerical salaries (variable)	370,000	Factory methods research	42,000
		Abrasives for machining	99,000
Fire insurance on factory equipment	4,000	Indirect labor	950,000
Property taxes on factory equipment	26,000	Depreciation on factory equipment	430,000

1. Prepare a contribution income statement and an absorption income statement. If you are in doubt about any cost behavior pattern, decide on the basis of whether the total cost in question will fluctuate substantially over a wide range of volume. Prepare a separate supporting schedule of indirect manufacturing costs subdivided between variable and fixed costs.

2. Suppose that all variable costs fluctuate directly in proportion to sales, and that fixed costs are unaffected over a wide range of sales. What would operating income have been if sales had been $12 million instead of $14 million? Which income statement did you use to help get your answer? Why?