Case 2-1 \"Now this doesn't make an)r sense at all,\" said t-I'lorence Gale, nancial vice president for Warner Bros. Company. \"Our sales have been steadily rising over the last several months, but prots have been going in the opposite direction. in September we nallyr hit P2,000,000 in sales, but the bottom line for that month drops off to a P100000 toss. Why aren't prots more closely correlated with sales?\" The statements to which Ms Gale was referring are shown below: July August September Sales (P25) Pl,750,000 0,875.11!) P2,000,000 Less: Cost of Goods Sold Beginning Inventory 80 I000I 320,000 400,000 Cost applied to production: Variable IMFTG cost 765 .000 $20,000 540,000 Fixed MFI'G cost 595,000 560,000 420,000 Cost of Goods Manufactured 1,360,000 1,280,000 960,000 Goods Available for Sale 1,440,000 1,600,000 1,360,000 Less: Ending Inventory 320,000 400,000 80,000 Cost of Goods Sold 1,120,000 1,200,000 1,280,000 Under/OverApplied Fixed OII 135,000! [0) 140,000 Adjusted CGS 1,035,000 1,200.00" 1.430.000 Gross hIargin P665,000 P675,\" P580,000 Less: Selling and Admin Expense 620 000 650 000 680 000 Net income-(loss) P45 ,000 P25,000 I'(100,000) Klein, a new graduate from a USCE who has just been hired by Warner, has stated to Ms. Gale that the contribution margin approach, with variable costing, is a much better way to report prot data to management. Sales and production data for the last quarter follow: July August September Production in units 85,000 30,000 60 000 Sales in units $0,000 75,000 80,000 Additional Information about the company's operations is given below: a. 5,000 units were in inventory on July 1 1:. Fixed manufacturing overhead costs total Pl,680,000 per quarter and are incurred evenly throughout the quarter. This xed manufacturing overhead cost is applied to units of product on a basis of a budgeted production volume of 80,000 units per month e. Variable selling and admin expenses are P6 per unit sold. The remainder of the selling and admin expenses on the statements above are fixed. (1. The company uses FIFO inventory ow assumption. Work in process inventories are insignicant and can be ignored. \"I know production is somewhat out of step with sales,\" said Karla E, the company's controller. "But we had to build inventory early in the quarter in anticipation of a strike in September. Since the union settled without a strike, we than had to cut back production in September in order to work off the excess inventories. The income statements you have are completely accurate. Requirements: 1. Compute the net income for each month using variable costing. {15 points) 2. Compute the monthly breakeven point under variable costing. {10 points) 3. Explain to Ms. Gale why profits have moved erratically over the three month period shown in the absorption costing statements above and why profits have not been more closely rated to changes in sales volume. (5 points} 4. Identify and discuss the advantages and disadvantages of using the variable costing method for internal reporting purposes. (5 points) 5. Reconcile the absorption costing and the variable costing net operating income figures for each month. (15 points) ANSWERS HERE