Reference no: EM132549135

Korona Company developed the following information for the product it sells:

Sales price                  $50 per unit

Direct materials            $15 per unit

Direct labour                 $5 per unit

Variable manufacturing overhead Fixed manufacturing overhead Variable selling expense   $8 per unit $550,000

Fixed selling expense                                                           10% of sales price $500,000

Variable administrative expense Fixed administrative expense      $2 per unit $300,000

For the year ended 31 December 2019, Korona Company produced and sold 100,000 units of product.

Required:

Question (a) Calculate the unit production cost under variable costing and absorption costing.

Question (b) The marketing manager proposed to the President of Korona Company to introduce sales commissions of $3 per unit as an incentive for the sales staff. In exchange, the sales staff would accept an overall decrease in their salaries of $35,000 per month. The marketing manager predicts that introducing this sales incentive would increase annual sales by 2,400 units. Prepare contribution format variable costing income statements for Korona Company to show the overall effect on the company's net operating income before and after the adoption of the proposal.

Question (c) Advise the President whether the marketing manager's proposal should be adopted.

Question (d) Give examples of circumstances in which that Cost-Volume-Profit assumption is violated.