Problem 7-23 Absorption and Variable Costing; Production Constant, Sales Fluctuate [LO7-1, LO7-2, LO7-3]

Tami Tyler opened Tamis Creations, Inc., a small manufacturing company, at the beginning of the year. Getting the company through its first quarter of operations placed a considerable strain on Ms. Tylers personal finances. The following income statement for the first quarter was prepared by a friend who has just completed a course in managerial accounting at State University.

Tamis Creations, Inc. Income Statement For the Quarter Ended March 31
Sales (28,350 units)				$	1,134,000
Variable expenses:
Variable cost of goods sold	$	467,775
Variable selling and administrative		195,615			663,390
Contribution margin					470,610
Fixed expenses:
Fixed manufacturing overhead		266,800
Fixed selling and administrative		223,810			490,610
Net operating loss				$	( 20,000)

Ms. Tyler is discouraged over the loss shown for the quarter, particularly because she had planned to use the statement as support for a bank loan. Another friend, a CPA, insists that the company should be using absorption costing rather than variable costing and argues that if absorption costing had been used the company probably would have reported at least some profit for the quarter.

At this point, Ms. Tyler is manufacturing only one producta swimsuit. Production and cost data relating to the swimsuit for the first quarter follow:

Units produced	33,350
Units sold	28,350
Variable costs per unit:
Direct materials		$	7.40
Direct labor		$	7.50
Variable manufacturing overhead		$	1.60
Variable selling and administrative		$	6.90

Required:

1. Complete the following:

a. Compute the unit product cost under absorption costing.

b. What is the companys absorption costing net operating income (loss) for the quarter?

c. Reconcile the variable and absorption costing net operating income (loss) figures.

3. During the second quarter of operations, the company again produced 33,350 units but sold 38,350 units. (Assume no change in total fixed costs.)

a. What is the companys variable costing net operating income (loss) for the second quarter?

b. What is the companys absorption costing net operating income (loss) for the second quarter?

c. Reconcile the variable costing and absorption costing net operating incomes for the second quarter.