Tami Tyler opened 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. Tyler's personal finances. The following incoming statement for the first quarter was prepared by a friend who has just completes a course in managerial accounting at State University.

Tami's Creations, Inc

Income Statement

For the Quarter Ended March 31

Sales (28,000 units).......... 1,120,000

Variable Expenses:

Variable costs of goods sold....... $462,000

Variable Selling and Administrative...... 168,000 630,000

Contribution Margin.......... 490,000

Fixed Expenses:

Fixed manufacturing overhead........... 300,000

Fixed Selling and administrative........... 200,000 500,000

Net Operating loss........... $ (10,000)

Ms. Taylor is discourage over the loss shown for the quarter, particulary 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. Taylor is manufacturing only one product - a swimsuit. Production and cost data relating to the swimsuit for the first quarter follow:

Units produced.......................... 30,000

Units sole....................... 28,000

Variable costs per unit:

Direct Materials................. $3.50

Direct Labor........... $12.00

Variable Manufacturing overhead... $1.00

Variable selling and administrative..... $6.00

Required:

1. Complete the following:

a. Compute the unit product cost under absorption costing.

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

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

2. Was the CPA correct in suggesting that the company really earned a "profit" for the quarter?

Explain

3. During the second quarter of operations, the company again produced 30,000 units but sold 32,000 units. (Assume no change in total fixed costs.)

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

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

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