Reference no: EM132558425

Question - Absorption versus variable costing

Sonnenheim, a pharmaceutical company, has a new division that will produce and market Mimic for treatment of hair loss. Each patient who has been prescribed Mimic purchases a year's worth of treatment at a time, which is sold in a single package. For 2019, its first year of producing and selling Mimic, Sonnenheim estimates sales of 50,000 packages and so produces 50,000 packages. Actual 2019 sales are 44,800 packages. The average wholesale selling price is $1,200 per package. Sonnenheim's actual 2019 costs are:

Variable cost per unit

Manufacturing cost per package produced

Direct materials $55

Direct manufacturing labor $45

Manufacturing overhead $120

Marketing cost per package sold $75

Fixed costs

Manufacturing costs $7,358,400

R&D $4,905,600

Marketing $15,622,400

Required -

1. Calculate the operating income under variable costing.

2. Each package of Mimic produced is allocated $165 in fixed manufacturing costs. If the production-volume variance is written off to cost of goods sold, and there are no price, spending, or efficiency variances, calculate the operating income under absorption costing.

3. Explain the differences in operating incomes obtained in requirement 1 and requirement 2.

4. Sonnenheim's management is considering implementing a bonus for the Mimic plant manager based on gross margin under absorption costing. What incentives will this create for the plant manager? Do you think this new bonus plan is a good idea? Explain briefly.