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Problem 6-23 (Algo) Absorption and Variable Costing; Production Constant, Sales Fluctuate [LO6-1, LO6-2, LO6-3]

Tami Tyler opened Tamis Creations, Incorporated, a small manufacturing company, at the beginning of the year. Getting the company through its first quarter of operations placed a considerable strain on Ms. Tylers personal finances. The following income statement for the first quarter was prepared by a friend who has just completed a course in managerial accounting at State University.

Tamis Creations, Incorporated Income Statement For the Quarter Ended March 31
Sales (28,700 units)		$ 1,148,000
Variable expenses:
Variable cost of goods sold	$ 419,020
Variable selling and administrative	192,290	611,310
Contribution margin		536,690
Fixed expenses:
Fixed manufacturing overhead	253,600
Fixed selling and administrative	295,090	548,690
Net operating loss		$ ( 12,000)

Ms. Tyler is discouraged 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. Tyler is manufacturing only one producta swimsuit. Production and cost data relating to the swimsuit for the first quarter follow:

Units produced	31,700
Units sold	28,700
Variable costs per unit:
Direct materials	$ 7.20
Direct labor	$ 5.90
Variable manufacturing overhead	$ 1.50
Variable selling and administrative	$ 6.70

Required:

1. Complete the following:

a. Compute the unit product cost under absorption costing.

b. What is the companys absorption costing net operating income (loss) for the quarter?

c. Reconcile the variable and absorption costing net operating income (loss) figures.

3. During the second quarter of operations, the company again produced 31,700 units but sold 34,700 units. (Assume no change in total fixed costs.)

a. What is the companys variable costing net operating income (loss) for the second quarter?

b. What is the companys absorption costing net operating income (loss) for the second quarter?

c. Reconcile the variable costing and absorption costing net operating incomes for the second quarter.

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