Income statement preparation using contribution

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Reference no: EM1314931

Income statement preparation using contribution and Absorption Costing

Straightforward Income Statements

The Independence Company had the following manufacturing data for the year 2006 (in thousands of dollars).
Beginning and ending inventories none

Direct material used $400

Direct labor 330

Supplies 20

Utilities-variable portion 40

Utilities-fixed portion 12

Indirect labor-variable portion 90

Indirect labor-fixed portion 40

Depreciation 200

Property taxes 20

Supervisory salaries 50

Selling expenses were $300,000 (including $60,000 that were variable) and general administrative expenses were $144,000 (including $23,000 that were variable). Sales were $1.8 million.

Direct labor and supplies are regarded as variable costs.

1. Prepare two income statements, one using the contribution approach and one using the absorption approach.

2. Suppose that all variable costs fluctuate directly in proportion to sales and that fixed costs are unaffected over a very wide range of sales. What would operating income have been if sales had been $2.0 million instead of $1.8 million? Which income statement did you use to help obtain your answer? Why?

Reference no: EM1314931

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