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
Utilities-variable portion 40
Utilities-fixed portion 15
Indirect Labor-variable portion 90
Indirect Labor-fixed portion 50
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?
Sunshine State Fruit Company sells premium-quality oranges and other citrus fruits by mail order. Protecting the fruit during shipping is important so the company has designed and produces shipping boxes. The annual cost to make $80,000 boxes is
Indirect manufacturing cost
Therefore, the cost per box averages $2.60
Suppose Weyerhauser submits a bid to supply Sunshine State with boxes for $2.10 per box. Sunshine State must give Weyerhauser the box design specifications, and the boxes will be made according to those specs.
1. How much if any, would Sunshine State save by buying the boxes for Weyerhauser?
2. What subjective factors should affect Sunshine State’s decision about whether to make or buy the boxes?
3. Suppose all the fixed costs represent depreciation on equipment that was purchased for $600,000 and is just about at the end of its 10-year life. New replacement equipment will cost $800,000 and is also expected to last 10 years. In this case, how much, if any, would Sunshine State save by buying the boxes from Weyerhauser?
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