Sandi Scott obtained a patent on a small electronic device and organized Scott Products, Inc., to produce and sell the device. During the first month of operations, the device was very well received on the market so Ms. Scott looked forward to a healthy profit. For this reason, she was surprised to see a loss for the month on her income statement. This statement was prepared by her accounting service, which takes great pride in providing its clients with timely financial data. The statement follows: Scott Products, Inc. Income Statement $ 834,900 Sales (23,000 units) Variable expenses: Variable cost of goods sold Variable selling and administrative expenses $273,700 177,100 450,800 Contribution margin Fixed expenses: 384,100 Fixed manufacturing overhead Fixed selling and administrative expenses 210,600 216,000 426,600 Net operating loss $ (42,500) Ms. Scott is discouraged over the loss shown for the month, particularly because she had planned to use the statement to encourage investors to purchase stock in the new company. A friend, who is a CPA, 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 Units sold Variable costs per unit: 26,000 23,000 Direct materials Direct labor Variable manufacturing overhead $ 7.30 $ 3.00 $ 1.60 Variable selling and administrative expenses $ 7.70