PROBLEM S-14 Absorption and Variable Costing: Production Constant, Sales Fluctuate (L01 Q. L029.039, 1042] 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. Leander is discouraged over the loss shown for the month, particularly since she had planned to use the statement to encourage investors to purchase shares 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. b. Redo the company's income statement for the month using absorption costing. c. Reconcile the variable and absorption costing operating income (loss) figures. 2. Was the accountant correct in suggesting that the company really carned a profit for the month? Explain. 3. During the second month of operations, the company again produced 50,000 units but sold 60,000 units. (Assume no change in total fixed costs.) a. Prepare a contribution format income statement for the month using variable costing. b. Prepare an income statement for the month using absorption costing. c. Reconcile the variable costing and absorption costing operating income figures