Acme Corp. has begun a new division that will manufacture and sell plastic book covers emblazoned with university colors, name, and logo for textbooks. The divisions monthly costs are as follows:

Manufacturing costs:

Variable costs per unit:

Direct materials $1.45

Variable manufacturing overhead $2.35

Fixed manufacturing overhead costs per month $9,750

Selling and administrative costs:

Variable 12% of sales

Fixed per month $14,600

Acmes workers are all salaried, full-time employees. The company does not lay off its workers. The production process is highly automated, and so Acme includes labor costs in its fixed manufacturing overhead. The book covers sell for $10.75 each.

During the first month of operations, production and sales were as follows:

Book covers manufactured 5,350

Book covers sold 4,700

1. Compute the unit product cost using:

a. Variable costing

b. Absorption costing

2. Prepare an income statement for the month using variable costing.

3. Prepare an income statement for the month using absorption costing.

4. Acme would like to obtain financing for the new division from a venture capital company. Would Acme be better off to use the financial statements prepared under variable or absorption costing to obtain the capital it seeks? Why?

5. Reconcile the net incomes for variable and absorption costing, using the information you produced for questions 2 and 3.