Linsay traders are renown in manufacturing teak wood designer tables. Linsay traders has appointed you as a junior cost accountant and has requested you to prepare a report for the management based on the details furnished below. The following costs were incurred during the companys first year of operations:

Variable costs per unit:

Manufacturing:

Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . $36

Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14

Variable manufacturing overhead . . . . . . . . . . . . $4

Variable selling and administrative . . . . . . . . . . . $4

Fixed costs per year:

Fixed manufacturing overhead . . . . . . . . . . . . . . . . $400,000

Fixed selling and administrative expenses . . . . . . . $220,000

During the year, the company produced 40,000 units and sold 32,000 units of teak wood tables at a selling price of $100 per unit.

Required:

1. Calculate the unit product cost under both absorption costing and variable costing method.

(20 marks)

2. Prepare an income statement under both absorption costing and variable costing. (20 marks)

3. Comment on the reasons for the variations noticed in net operating income under both these methods. (10 marks)

4. The company in charge suggests an increase in selling price from $100 to $101 and prefers to sell 30000 units at $101. Comment on the feasibility of the decision. (20 marks)