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Jack Bridgton opened Novelty Creations, Inc., a small manufacturing company, at the beginning of 2021. Getting the company through its first two-quarters of operations placed considerable stress on Ms. Bridgtons personal finances. The following income statement was prepared for the second quarter by a friend who has just completed a course in managerial accounting at a local community college.

Novelty Creations, Inc. Income Statement For the Quarter Ended June 30, 2021
Sales (28,000 units)		$1,120,000
Variable expenses:
Variable cost of goods sold	$462,000
Variable selling and administrative	168,000	630,000
Contribution margin		490,000
Fixed expenses:
Fixed manufacturing overhead	300,000
Fixed selling and administrative	200,000	500,000
Net operating loss		$(10,000)

Ms. Bridgton was very unhappy over the loss shown for the quarter, particularly because she had planned to use the statement as support for a bank loan. Another friend, a CPA, insists that the company should be using absorption costing rather than variable costing and argues that if absorption costing had been used the company probably would have reported at least some profit for the quarter.

At this point, Ms. Bridgton is manufacturing only one producta designer jumpsuit. Production and cost data relating to the jumpsuit for the above period follow:

Units produced	30,000
Units sold	28,000
Variable costs per unit:
Direct materials	$3.50
Direct labor	$12.00
Variable manufacturing overhead	$1.00
Variable selling and administrative overhead	$6.00

Required:

1. Complete the following:
   1. Compute the unit product cost under absorption costing.
   2. What is the companys absorption costing net operating income (loss) for the quarter?
   3. Reconcile the variable and absorption costing net operating income (loss) figures.
2. Was the CPA correct in suggesting that the company really earned a profit for the quarter? Explain.
3. During the third quarter of operations, the company again produced 30,000 units but sold 32,000 units. (Assume no change in total fixed costs.)
   1. What is the companys variable costing net operating income (loss) for the third quarter?
   2. What is the companys absorption costing net operating income (loss) for the third quarter?
   3. Reconcile the variable costing and absorption costing net operating incomes for the third quarter.

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