The Biscuit Lover Company manufactures a single product, Brownie, the standard costs per unit being variable manufacturing $8, fixed manufacturing $6. The selling price is $20 per unit. Actual and budgeted fixed overhead is $900,000 each month. Budgeted production is 150,000 units per month, though the production supervisor can decide the actual production level for each month. Monthly sales are highly seasonal, and the fluctuation is mainly subject to market demand but not managers' marketing effort. For the month of May 2020, the actual production level is maintained as budgeted, and the actual sales is 125,000 units.

The selling and administrative cost is a semi-variable cost. During the peak month when Biscuit Lover sells 250,000 units; the selling and administrative cost is $600,000. During the down season when Biscuit Lover sells 50,000 units, the selling and administrative cost is $200,000. In Biscuit Lover Company, the pay of the production supervisor is linked to the level of net profit reported under absorption costing.

Required:

1. Use the high-low method to estimate the cost function for selling and administrative costs.

2. Prepare an absorption costing income statement for Biscuit Lover Company for May 2020.

3. Prepare a variable costing contribution margin statement for Biscuit Lover Company for May 2020.

4. Reconcile (using the short-cut method) and explain the differences between the profits under the two statements.

5. Calculate the contribution margin ratio and firm's monthly break-even revenue.