I am really lost here, any help would be great.

Problem:
Production: 25,000 units
Sales (25,000 units) $2,500,000
Cost of goods sold
Starting inventory (10,000 units) $650,000
Production costs 1,625,000
Total $2,275,000
Ending inventory 650,000
Gross profit 1,625,000
Selling and general expenses 500,000
Net income $375,000

Production capacity is 50,000 units with a fixed overhead of $500,000. Variable cost is $45 per unit. Sales forcasted for second qtr is 25,000 units. Production for second qtr is scheduled to be 50,000 units.

Task is to convert the absorption income statement to a contribution margin income statement for the first quarter and prepare the same (absorption and contribution margin) for the second quarter. Also to compute production costs per unit for both approaches. I did the math and come up with a net income of 375,000 (absorption) and 875,000 contribution margin) for both quarters even though the production has changed, this does not seem right to me. I feel like I am missing some step but I have no idea what.

This is all the information I have to work this problem.

Quote:

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Originally Posted by misgm11

I am really lost here, any help would be great.

Problem:
Production: 25,000 units
Sales (25,000 units) $2,500,000
Cost of goods sold
Starting inventory (10,000 units) $650,000
Production costs 1,625,000
Total $2,275,000
Ending inventory 650,000
Gross profit 1,625,000
Selling and general expenses 500,000
Net income $375,000

Production capacity is 50,000 units with a fixed overhead of $500,000. Variable cost is $45 per unit. Sales forcasted for second qtr is 25,000 units. Production for second qtr is scheduled to be 50,000 units.

Task is to convert the absorption income statement to a contribution margin income statement for the first quarter and prepare the same (absorption and contribution margin) for the second quarter. Also to compute production costs per unit for both approaches. I did the math and come up with a net income of 375,000 (absorption) and 875,000 contribution margin) for both quarters even though the production has changed, this does not seem right to me. I feel like I am missing some step but I have no idea what.

This is all the information I have to work this problem.

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First some definitions; Contribution margin is that income which is provided from product sales before fixed and selling and other costs are taken into account, If sales in both quarters are the same, would you expect similar results? The only thing that can vary here is the amount of fixed overhead aborbed into total unit cost of production and as production has increased product unit cost should fall and profit increase

Some numbers Variable costs 25000 * 45 = 1125000 50000 * 45 = 2250000
Fixed costs 500000 500000
1625000 2750000
Unit cost 65 55
There is a number you have not been given
Gross profit 1625000
selling costs 500000
? 750000
Net income 375000
so do we assume 66.6% tax or other costs of 750000

we have at least three different product costs here 62.5 opening stock !st qtr 65 and 2nd qtr 55 so the ending inventory calculation (!st quarter) is inconsistent unless you are using LIFO I hope I haven't confused you further