The Independence Company had the following manufacturing data for the year 2009 (in thousands of dollars):
Direct material used $400
Direct Labor 300
Utilities-variable portion 40
Utilities-fixed portion 15
Indirect Labor-variable portion 90
Indirect Labor-fixed portion 50
Property Taxes 20
Supervisory salaries 60
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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