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Tami Tyler opened Novelty Creations, Inc., a small manufacturing company, at the beginning of 2021. Getting the company through its first two-quarters of operations placed

Tami Tyler opened Novelty Creations, Inc., a small manufacturing company, at the beginning of 2021. Getting the company through its first two-quarters of operations placed considerable stress on Ms. Bridgtons personal finances. The following income statement was prepared for the second quarter by a friend who has just completed a course in managerial accounting at a local community college.

Novelty Creations, Inc. Income Statement For the Quarter Ended June 30, 2021

Sales (28,000 units)

$1,120,000

Variable expenses:

Variable cost 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. Tyler was very unhappy over the loss shown for the quarter, particularly 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. Tyler is manufacturing only one producta designer jumpsuit. Production and cost data relating to the jumpsuit for the above period follow:

Units produced

30,000

Units sold

28,000

Variable costs per unit:

Direct materials

$3.50

Direct labor

$12.00

Variable manufacturing overhead

$1.00

Variable selling and administrative overhead

$6.00

Question:

A. Complete the following:

  1. Compute the unit product cost under absorption costing.
  2. What is the companys absorption costing net operating income (loss) for the quarter?
  3. Reconcile the variable and absorption costing net operating income (loss) figures.

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

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