Viti Boutique imports designer clothing manufactured by subcontractors in New Zealand. Clothing is a seasonal product. The goods must be ready for sale prior to the start of the season. Any goods left over at the end of the season usually must be sold at steep discounts. Viti Boutique prepares a dress design and selects fabrics approximately six months before a given season. It receives these goods and distributes them at the start of the season. Based on past experience, Viti Boutique estimates that 60 percent of a particular lot of dresses will be unsold at the end of the season and will be marked down to half of the initial retail price. Even with the markdown, a substantial number of dresses will remain unsold and will be returned to Viti Boutique and destroyed. Although a large number of dresses must be discounted and destroyed, Viti Boutique needs to place a minimum order of 1,000 dresses to have a sufficient selection of styles and sizes to market the design.

Recently, Viti Boutique placed an order for 1,000 dresses of a particular design for $25,000 plus import duties of $5,000 and a $7 commission for each dress sold at retail, regardless of the price. Return mailing and disposing of each unsold dress cost $3 after the end of the markdown period.

REQUIRED

Use absorption costing to compute the cost of each dress in this lot of dresses.

Suppose that the company sells 30 percent of the dresses in this lot for $75 each during the first accounting period. Using absorption costing, what is the value of the ending inventory? What is the operating profit or loss for the period, assuming no other transactions and that the season has not ended, so that the number of dress subject to markdown or to be returned is unknown?

During the second period, 10 percent of the 1,000 dresses were sold at full price, and 30 percent were sold at half-price. The remaining dresses were returned and disposed of. Using absorption costing, what is the operating profit or loss for the period, assuming no other transactions?

Assuming that purchase price and the import duties are regarded as a committed cost to the import decision, how would it affect the measurement of profit of the firm in the first and second years of operation?