Question 1: Variable Costing versus Absorption Costing (19 marks) Another Anonymous Agency Inc. (AAA) has recently set up a new division to manufacture and sell specially designed dinner plates, using high quality porcelain. The division's monthly costs are shown in the schedule below: Manufacturing costs Variable costs per unit: Direct materials 12 Variable manufacturing overhead Fixed manufacturing costs (total) 4 Selling and administrative costs: Variable 10% of sales Fixed (total) 80,000 AAA regards all of its workers as full-time employees, and the company has a long-standing no-layoff policy. Furthermore, production is highly automated. Accordingly the company includes its labour costs in its fixed manufacturing overhead. The plates sell for $70 each. During the first month of operations, the following activity was recorded: Units produced 5,000 Units sold 4,000 Required a) Compute the unit product cost under: i. Absorption costing ii. Variable costing b) Prepare an income statement for the month using absorption costing. [3 marks] c) Prepare a contribution format income statement for the month using variable costing. [H marks] [6 marks] d) Assume that the company must obtain additional financing. As a member of the management team, which of the statements that you have prepared in (b) and (c) above would you prefer to have with you when you negotiate with the bank? Why? [3 marks] e) Reconcile the absorption costing and variable costing operating income figures in (b) and (c) above. [3 marks] [TOTAL: 19 MARKS]