ACC- The Independence Company

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

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?