Reference no: EM132611506

Maxwell Company manufactures and sells a single product. The following costs were incurred during the company's first year of operations:

Variable costs per unit:

Manufacturing:

Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . $18

Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7

Variable manufacturing overhead . . . . . . . . . . . . $2

Variable selling and administrative . . . . . . . . . . . . . . $2

Fixed costs per year:

Fixed manufacturing overhead . . . . . . . . . . . . . . . . $200,000

Fixed selling and administrative expenses . . . . . . . $110,000

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:

Question 1. Assume that the company uses absorption costing:

a. Compute the unit product cost.

b. Make an income statement for the year.

Question 2. Assume that the company uses variable costing:

a. Compute the unit product cost.

b. Make an income statement for the year.

Question 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?