KK Medical is a manufacturing company. The company president is concerned about the last quarter financial
results supporting much needed bank financing for continued operations. The following income statement for
the last quarter was prepared using variable product costing which was recommended by a management
consultant as being the most relevant for managerial decision making.
Sales (40,000 units)
Variable expenses:
Variable cost of goods sold
Variable selling and administrative
Contribution margin
Fixed expenses:
Fixed manufacturing overhead
Fixed selling and administrative
KK Medical
Income Statement
For the Quarter Ended June 30
$\n2,400,000
$\n1,000,000
440,000
1,440,000
960,000
792,000
188,000
980,000
$\n(20,000)
Net operating loss
The company produces one product which is a portable oxygen generator. The company president is a former
CPA. She believes that the company should determine income using absorption costing rather than variable
costing because that could show more income to support applying for the bank loan.
Production and cost data for the last quarter are shown below:
Units produced
Units sold
Variable costs per unit:
Direct materials
Direct labor
Variable manufacturing overhead
Variable selling and administrative
44,000
40,000
$\n10.00
$\n12.00
$\n3.00
$\n11.00
Required:
1. Complete the following
a. Compute the unit product cost under absorption costing
b. Redo the company's income statement for last quarter using absorption costing.
c. Reconcile the variable costing and absorption net incomes.
2. Was the CPA correct in suggesting that the company really earned a profit for the quarter? Explain.
3. The company budget for next quarter expects production to again be 44,000 units. Forecasted sales
are 48,000 units. (Assume no change in unit variable costs or total fixed costs.)
a. Prepare a contribution format income statement for the quarter using variable costing.
b. Prepare an income statement for the quarter using absorption costing.
c. Reconcile the variable costing and absorption costing net incomes.
4. What level of quarterly sales is required for KK Medical to sustain a profit?
