# Acct 505 Excercise 6-7

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EXERCISE 6–7 Variable and Absorption Costing Unit Product Costs and Income Statements [LO1, LO2]

Maxwell Company manufactures and sells a single product. The following costs were incurred during the company's first year of operations:
During the year, the company produced 20,000 units and sold 16,000 units. The selling price of the company's product is \$50 per unit.
Required:
* 1. Assume that the company uses absorption costing: * a. Compute the unit product cost. * b. Prepare an income statement for the year. * 2. Assume that the company uses variable costing: * a. Compute the unit product cost. * b. Prepare an income statement for the year. * 3. The company's controller believes that the company should have set last year's selling price at \$51 instead of \$50 per unit. She estimates the company could have sold 15,000 units at a price of \$51 per unit, thereby increasing the company's gross margin by \$2,000 and its net operating income by \$4,000. Assuming the controller's estimates are accurate, do you think the price increase would have been a good idea?

Exercise 6-7 (30 minutes) 1. a. The unit product cost under absorption costing would be:

Direct materials | \$18 | Direct labor | 7 | Variable manufacturing overhead | 2 | Total variable manufacturing costs | 27 | Fixed manufacturing overhead (\$200,000 ÷ 20,000 units) | 10 | Absorption costing unit product cost | \$37 | | | b. The absorption costing income statement:

Sales (16,000 units × \$50 per unit) | \$800,000 | Cost of goods sold (16,000 units × \$37 per unit) | 592,000 | Gross margin | 208,000 | Selling and administrative expenses
[(16,000 units × \$2 per unit) + \$110,000] | 142,000 | Net operating income | \$ 66,000 | | | 2. a. The unit product cost under…...

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