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5-B1 Contribution and Absorption Income Statements

The following information is taken from the records of the Zealand Manufacturing Company for the year ending December 31, 2012. There were no beginning or ending inventories.

Sales $14,000,000 Long-term rent, factory $ 85,000

Sales commissions 470,000

Advertising 430,000

Factory superintendents salary 31,000 Shipping expenses 320,000

Factory supervisors salaries 105,000 Direct materials used 3,500,000

Administrative executive salaries 100,000 Direct labor 1,700,000

Cutting bits used 53,000

Administrative clerical salaries (variable) 370,000 Factory methods research 42,000

Abrasives for machining 99,000

Fire insurance on factory equipment 4,000 Indirect labor 950,000

Property taxes on factory equipment 26,000 Depreciation on factory equipment 430,000

1. Prepare a contribution income statement and an absorption income statement. If you are in doubt about any cost behavior pattern, decide on the basis of whether the total cost in question will fluctuate substantially over a wide range of volume. Prepare a separate supporting schedule of indirect manufacturing costs subdivided between variable and fixed costs.

2. Suppose that all variable costs fluctuate directly in proportion to sales, and that fixed costs are unaffected over a wide range of sales. What would operating income have been if sales had been $12 million instead of $14 million? Which income statement did you use to help get your answer? Why?