SOLUTION 8-38

1. Cost per unit:

(a) Absorption Costing (b) Variable Costing

Direct material ............................. $40 ....................................................... $40

Direct labor .................................. 22 ....................................................... 22
Manufacturing overhead
Variable ..................................... 16 ....................................................... 16
Fixed ($400,000 ÷ 25,000) ........ 16
Total absorption cost per unit .... $94
Total variable cost per unit ............................................................................ $78

2. a. GREAT OUTDOZE, INC.

OPERATING INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 20X4
ABSORPTION COSTING

Sales revenue (at $130 per unit) ..................................................... $2,860,000

Less: Cost of goods sold (at
absorption cost of $94 per unit) ................................................... 2,068,000
Gross margin .................................................................................... $ 792,000
Less: Selling and administrative expenses:
Variable (at $2 per unit) ....................................................... 44,000
Fixed ..................................................................................... 60,000
Operating income ............................................................................ $ 688,000
 b. GREAT OUTDOZE, INC.
OPERATING INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 20X4
VARIABLE COSTING

Sales revenue (at $130 per unit) ..................................................... $2,860,000

Less: Variable expenses:
Variable manufacturing costs
(at variable cost of $78 per unit) ....................................... 1,716,000
Variable selling and administrative costs
(at $2 per unit) .................................................................... 44,000
Contribution margin ........................................................................ $1,100,000
Less: Fixed expenses:
Fixed manufacturing overhead ........................................... 400,000
Fixed selling and administrative costs .............................. 60,000
Operating income ............................................................................ $ 640,000

3. Change in predetermined absorption-costing income

inventory  fixed overhead = minus variable-costing
(in units) rate income

3,000 unit increase  $16 = $48,000