Problem 8-13 Absorption and Variable Costing; Production Constant, Sales Fluctuate [LO1, LO2, LO3, LO4]

Leander Office Products, Inc., produces and sells small storage and organizational products for office use. During the first month of operations, the products sold well. Andrea Leander, the owner of the company, was surprised to see a loss for the month on her income statement. This statement was prepared by a local bookkeeping service recommended to her by her bank manager. The statement follows.

LEANDER OFFICE PRODUCTS, INC. INCOME STATEMENT
Sales (40,000 units)				$	200,000
Variable expenses:
Variable cost of goods sold*	$	80,000
Variable selling and administrative expenses		30,000			110,000
Contribution margin					90,000
Fixed expenses:
Fixed manufacturing overhead		75,000
Fixed selling and administrative expenses		20,000			95,000
Operating loss				$	(5,000	)

* Consists of direct materials, direct labour, and variable manufacturing overhead.

Andrea is discouraged over the loss shown for the month, particularly since she had planned to use the statement to encourage investors to purchase stock in the new company. A friend, who is an accountant, insists that the company should be using absorption costing rather than variable costing. He argues that if absorption costing had been used, the company would probably have reported a profit for the month.

Selected cost data relating to the product and to the first month of operations follow:

Units produced		50,000
Units sold		40,000
Variable costs per unit:
Direct materials	$	1.00
Direct labour	$	0.80
Variable manufacturing overhead	$	0.20
Variable selling and administrative expenses	$	0.75

Required:

1.	Complete the following:

a.	Compute the unit product cost under absorption costing. (Round your answer to 2 decimal places. Omit the "$" sign in your response.)

Unit product cost

$

b.	Redo the company