The annual data that follows pertain to See Underwater, a manufacturer of swimming goggles (the company had no beginning inventories):
Sales price....................................................................................... $ 44
Variable manufacturing expense per unit........................................ $ 15
Sales commission expense per unit................................................... $ 6
Fixed manufacturing overhead............................................. $2,475,000
Fixed operating expenses........................................................ $ 250,000
Number of goggles produced................................................... 225,000
Number of goggles sold............................................................ 205,000
Requirements
1. Prepare both conventional (absorption costing) and contribution margin (variable costing) income statements for See Underwater for the year.
2. Which statement shows the higher operating income? Why?
3. The company marketing vice president believes a new sales promotion that costs $145,000 would increase sales to 225,000 goggles. Should the company go ahead with the promotion? Give your reason.