2. The absorption costing income statement appears below:
Sales (19,000 units × $210 per unit) ... $3,990,000
Cost of goods sold:
Beginning inventory... $ 0
Add cost of goods manufactured
(20,000 units × $185 per unit)... 3,700,000
Goods available for sale ... 3,700,000
Less ending inventory
(1,000 units × $185 per unit) ... 185,000 3,515,000
Gross margin ... 475,000
Less selling and administrative expenses:
Variable selling and administrative expenses
(19,000 units × $10 per unit) ... 190,000
Fixed selling and administrative expenses... 285,000 475,000
Net operating income ... $ 0
Note: The company apparently has exactly zero net operating income
even though its sales are below the break-even point computed in Exer-
cise 7-8. This occurs because $35,000 of fixed manufacturing overhead
has been deferred in inventory and does not appear on the income
statement prepared using absorption costing.
Problem 7-10 (45 minutes)
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