ACC- The Independence Company




The Independence Company had the following manufacturing data for the year 2009 (in thousands of dollars):

Beginning and ending inventories None

Direct material used $400

Direct Labor 300

Supplies 20

Utilities-variable portion 40

Utilities-fixed portion 15

Indirect Labor-variable portion 90

Indirect Labor-fixed portion 50

Depreciation 200

Property Taxes 20

Supervisory salaries 60

Selling expenses were $300,000 (including $80,000 that were variable) and general administrative expenses were $144,000 (including $25,000 that were variable). Sales were $2.2 million.

Direct labor and supplies are regarded as variable costs.

1. Prepare two income statements, one using the contribution approach and one using that absorption approach.

2. Suppose that all variable cost fluctuate directly in proportion to sales and that fixed costs are unaffected over a very wide range of sales. What would operating income have been if sales had been $2.0 million instead of $2.2 million? Which income statement did you use to help obtain your answer? Why?


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