Problem 7-23 Absorption and Variable Costing; ProductionConstant, Sales Fluctuate [LO7-1, LO7-2, LO7-3]

Tami Tyler opened Tami’s Creations, Inc., a small manufacturingcompany, at the beginning of the year. Getting the company throughits first quarter of operations placed a considerable strain on Ms.Tyler’s personal finances. The following income statement for thefirst quarter was prepared by a friend who has just completed acourse in managerial accounting at State University.

Tami’s Creations, Inc. Income Statement For the Quarter Ended March 31
Sales (28,350 units)				$	1,134,000
Variable expenses:
Variable cost of goods sold	$	467,775
Variable selling and administrative		195,615			663,390
Contribution margin					470,610
Fixed expenses:
Fixed manufacturing overhead		266,800
Fixed selling and administrative		223,810			490,610
Net operating loss				$	( 20,000)

Ms. Tyler is discouraged over the loss shown for the quarter,particularly because she had planned to use the statement assupport for a bank loan. Another friend, a CPA, insists that thecompany should be using absorption costing rather than variablecosting and argues that if absorption costing had been used thecompany probably would have reported at least some profit for thequarter.

At this point, Ms. Tyler is manufacturing only one product—aswimsuit. Production and cost data relating to the swimsuit for thefirst quarter follow:

Units produced	33,350
Units sold	28,350
Variable costs per unit:
Direct materials		$	7.40
Direct labor		$	7.50
Variable manufacturing overhead		$	1.60
Variable selling and administrative		$	6.90

Required:

1. Complete the following:

a. Compute the unit product cost under absorption costing.

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

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

3. During the second quarter of operations, the company againproduced 33,350 units but sold 38,350 units. (Assume no change intotal fixed costs.)

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

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

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