Question

answer requirements 1,2 and 3

The annual data that follows pertain to Swim Clearly, a manufacturer of swimming goggles (the company had no beginning inventory): (Click the icon to view the data.) Read the requirements.

Answer 1

1)

Fixed Overhead cost per unit

= Total Fixed manufacturing overhead /Number of units produced

= 2760000 / 230000

= $ 12 per unit

Unit cost under Absorption costing

= Variable manufacturing cost per unit +Fixed Overhead cost per unit

= 17 + 12

= $29 per unit

SWIM CLEARLY INCOME STATEMENT (ABSORPTION COSTING) FOR THE YEAR ENDED DECEMBER 31
Sales revenue (46*215000)	9890000
less: Cost of goods sold (29*215000)	6235000
Gross profit	3655000
Less: Operating expense	2200000
Operating income	1455000

SWIM CLEARLY INCOME STATEMENT (VARIABLE COSTING) FOR THE YEAR ENDED DECEMBER 31
Sales revenue		9890000
less: Variable expense
Variable cost of sales (17*215000)	3655000
sales commission (9*215000)	1935000
Total variable cost		5590000
Contribution margin		4300000
less: Fixed cost (2760000+265000)		3025000
Operating income		1275000

2) Absorption costing income statement shows higher income because the number of units produced is higher than the number of units sold which means some of the fixed manufacturing cost is deferred in ending inventory whereas under variable costing the whole of the fixed manufacturing cost is charged as a period cost.

3)Since the company income will increase (from 1275000 to 1410000) if new sales promotion is undertaken, therefore, the Company should go ahead with the promotion.

SWIM CLEARLY INCOME STATEMENT (VARIABLE COSTING) FOR THE YEAR ENDED DECEMBER 31
Sales revenue (230000*46)		10580000
less: Variable expense
Variable cost of sales (17*230000)	3910000
sales commission (9*230000)	2070000
Total variable cost		5980000
Contribution margin		4600000
less: Fixed cost (2760000+265000+165000)		3190000
Operating income		1410000