Instructions

Zeitgeist Company manufactures silicon sleeves for MP3 players. In August of last year, Zeitgeist began producing the colorful sleeves. During the month of August, 16,000 were produced, and 14,750 were sold at $6.95 each. The following costs were incurred:

Direct materials Direct labor Variable overhead Fixed overhead

$26,880 6,720 5,920 28,160

A selling commission of 8% of sales price was paid. Administrative expenses, all fixed, amounted to $37,890.

Required:

1. Calculate the unit cost and the cost of ending inventory under absorption costing. (Round unit cost to the nearest cent and cost of ending inventory to the nearest dollar.)

2. Calculate the unit cost and the cost of ending inventory under variable costing. (Round unit cost to the nearest cent and cost of ending inventory to the nearest dollar.)

3. What is the contribution margin per unit? (Round to the nearest cent.)

4. CONCEPTUAL CONNECTION: Zeitgeist believes that multicolored sleeves will really take off after one year of sales. Management thinks sales

this August will be twice as high as sales last August. Prepare an income statement for August of this year using the assumed higher level of sales. Which costing method should be usedabsorption costing or variable costing?

Labels and Amount Descriptions

Refer to the list below for the exact wording of a label or an amount description within your income statement.

Labels

Add variable expenses Add fixed expenses Less variable expenses Less fixed expenses Amount Descriptions Commissions Contribution margin Fixed overhead

Fixed administrative Operating income Operating loss Sales

Variable cost of goods sold

Costs and Contribution Margin

1. Calculate the unit cost and the cost of ending inventory under absorption costing. (Round unit cost to the nearest cent and cost of ending inventory to the nearest dollar.)

Under the absorption costing method, the unit cost is . The cost of ending inventory is ___________

2. Calculate the unit cost and the cost of ending inventory under variable costing. (Round unit cost to the nearest cent and cost of ending inventory to the nearest dollar.)

Under the variable costing method, the unit cost is . The cost of ending inventory is ________

3. What is the contribution margin per unit? (Round to the nearest cent.)

The contribution margin per unit is _______

Zeitgeist believes that multicolored sleeves will really take off after one year of sales. Management thinks sales this August will be twice as high as sales last August. (Be sure to complete 4(b) below the income statement.)

4(a) Prepare an income statement for August of this year using the assumed higher level of sales. Refer to the list of Labels and Amount Descriptions for the exact wording of text items within your income statement.

Zeitgeist Company

Income Statement

For August of This Year

1
2
3
4
5
6
7
8
9

4(b) Which costing method should be usedabsorption costing or variable costing?

Zeitgeist should choose the _________ costing method.