Part A: Answer each of the following questions. Be sure to show all of your work and calculations.

P10-2 Absorption costing versus direct costing

Marion Corporation has determined the following selling price and manufacturing cost per unit based on normal production of 72,000 units per year:

Selling price per unit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22

Variable cost per unit:

Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $      4

Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       4

Variable factory overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          2

Variable cost per unit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $       10

Fixed cost per unit:

Fixed factory overhead per year . . . . . . . . . . . . . . . . . . . . . . . . . . . . $          324,000

Fixed selling and administrative expense per year . . . . . . . . . . .                   48,000

Normal unit production per year . . . . . . . . . . . . . . . . . . . . . . . . . . .               72,000

Month                                                                         Units Produced                       Units Sold

October . . . . . . . . . . . . . . . . . . . . . .                           6,000                           3,000

November . . . . . . . . . . . . . . . . . . . .                           1,000                           4,000

December . . . . . . . . . . . . . . . . . . . .                            8,000                          6,000

October has no beginning inventories.

Required:

Prepare comparative income statements, including a comparative schedule of cost of goods sold, for each of these three months under each of the following:

1. Absorption costing (includes under- or over applied overhead).

2. Variable costing.

P10-10 Effect of taxes on break-even and target volume

Buscemi Products, Inc., desires an after-tax income of $500,000. It has fixed costs of $2,500,000, a unit sales price of $300, and unit variable costs of $150, and is in the 40% tax bracket.

Required:

1. What amount of pre-tax income is needed to earn an after-tax income of $500,000?

2. What target volume sales revenue must be reached to earn the $500,000 after-tax income?

3. Assuming that this is a single-product firm, how many units must be sold to earn the after-tax income of $500,000?

4. What target volume sales revenue would have been needed to achieve the $500,000 of income had no income tax existed?

Comprehensive Review Problem: Break-even point; absorption and variable cost analysis

Mallory Manufacturing Company has a maximum productive capacity of 210,000 units per year. Normal capacity is 180,000 units per year. Standard variable manufacturing costs are $10 per unit. Fixed factory overhead is $360,000 per year. Variable selling expense is $5 per unit, and fixed selling expense is $252,000 per year. The unit sales price is $20.

The operating results for the year are as follows: sales, 150,000 units; production, 160,000 units; beginning inventory, 10,000 units. All variances are written off as additions to (or deductions from) the standard cost of sales.

Required:

1. What is the break-even point expressed in dollar sales?

2. How many units must be sold to earn a net operating income of $100,000 per year?

3. Prepare a formal income statement for the year under the following:

a. Absorption costing. (Hint: Don’t forget to compute the volume variance.)

b. Variable costing.

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