Case 2-1 "Now this doesn't make any sense at all," said Florence Gale, financial vice president for Warner Bros. Company. "Our sales have been steadily rising over the last several months, but profits have been going in the opposite direction. In September we finally hit P2,000,000 in sales, but the bottom line for that month drops off to a P100,000 loss. Why aren't profits more closely correlated with sales?" The statements to which Ms Gale was referring are shown below: July August September Sales (P25) P1,750,000 P1,875,000 P2,000,000 Less: Cost of Goods Sold Beginning Inventory 80,000 320,000 400,000 Cost applied to production: Variable MFTG cost 765,000 720,000 540,000 Fixed MFTG 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 OH (35,000) (0) 140,000 Adjusted CGS 1,085,000 1,200,000 1,420,000 Gross Margin P665,000 P675,000 P580,000 Less: Selling and Admin Expense 620,000 650,000 680,000 Net income(loss) P45,000 P25,000 P(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 profit data to management. Sales and production data for the last quarter follow: July August September Production in units 85,000 80,000 60,000 Sales in units 70,000 75,000 80,000Additional Information about the company's operations is given below: a. 5,000 units were in inventory on July 1 b. Fixed manufacturing overhead costs total P1,680,000 per quarter and are incurred evenly throughout the quarter. This fixed manufacturing overhead cost is applied to units of product on a basis of a budgeted production volume of 80,000 units per month c. Variable selling and admin expenses are P6 per unit sold. The remainder of the selling and admin expenses on the statements above are fixed. d. The company uses FIFO inventory flow assumption. Work in process inventories are insignificant 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