Case study Green Manufactuers (GM) manufactured portable vacuum cleaners. It was the companys only product. From the accounting records the following figures were extracted: Budgeted cost per vacuum cleaner is as follows: Particulars Amount ($) Direct materials 40.00 Direct labour 27.20 Other variable production costs 2.80 The fixed production costs per year amounted to $150,000. GM budgeted to maintain a relatively constant production schedule of 2,500 vacuum cleaners each quarter. As the start of Quarter 1 2020, the company had no opening stock of vacuum cleaners and it had no raw material inventory. During the first two quarters of 2020, GM manufactured 2,000 vacuum cleaners in each of the first two quarters but sold only 1,500 units in each of the first two quarters of 2020. GM manufactured 3,000 vacuum cleaners in each of the last two quarters and sold 3,500 units in the third quarter and 3,000 units in the fourth quarter of 2020. The company sold the vacuum cleaners for $195 each in the first two quarters of 2020 and sold them for $200 each in the last two quarters of 2020. Fixed selling expenses were $10,000 per month and variable selling expenses per unit sold amounted to 5% of the selling price in the first two quarters of 2020 and 2.5% of the selling price in the last two quarters of 2020. Donald Bush, CEO of GM was considering changing the companys accounting system as he had become dissatisfied with the current absorption costing system. Donald had recently read about marginal costing, which sounded as though it would suit his company better as he felt it would give him a better picture of the financial results for his planning and decisionmaking purposes.

Required (1) Prepare absorption costing income statements for GM for each of the four quarters of 2020. [8 Marks] (2) Despite a balance in the closing stock at the beginning of the second quarter and a much higher closing stock at the end of the second quarter, why is the gross margin for the second quarter the same as the first quarter? [1 Mark] (3) Prepare marginal costing income statements for all four quarters of 2020. [8 Marks] (4) Why is there a difference in the total profit for the year 2020 between absorption costing and marginal costing income statements? [3 Marks]