Transcribed Image Text: The P. Talbot Company was organized just one month ago. The company manufactures
and sells a unique product that has been quickly accepted by consumers. The results of
the company’s first month of operations are shown below (absorption costing basis):
Sales (10,000 units @ $20)
Less Cost of Goods Sold
Gross Margin
Less Selling and Administrative expenses
$200,000
140,000
60,000
45,000
$15,000
Net Income
Variable selling and administrative expenses are $2 per unit. The company produced 12,000
units during the month. Variable manufacturing costs total $10 per unit, and fixed
manufacturing overhead costs total $48,000 per month.
Show calculations wherever possible
a) What is the ending inventory value using full-absorption costing?
Using a Variable costing basis Income statement:
What would be the Contribution margin?
What would be the net income/loss?
b) Reconcile the variable costing and absorption costing net income figures.
c) During the second year of operations, the cost structure for the company remained the same.
They produced 12,000 units of their product and sold 13,000 units. Without preparing financial
statements, which method would have the highest net income and how much larger would it
be?
Explain why?
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