Far North Telecom, Ltd., of Ontario

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Far North Telecom, Ltd., of Ontario, has organized a new division to manufacture and sell specialty cellular telephones. The division’s monthly costs are shown in the table below. Far North Telecom regards all of its workers as full-time employees and the company has a long-standing no layoff policy. Furthermore, production is highly automated. Accordingly, the company includes its labor costs in its fixed manufacturing overhead. The cellular phones sell for $150 each. During September, the first month of operations, the following activity was recorded: 12,000 units produced, 10,000 units sold. Comment on the five questions below the table. Respond to at least two of your fellow students’ postings.

Variable costs per unit:                                            
Direct Materials $48                                           
Variable manufacturing overhead $2                                           
Fixed manufacturing overhead costs (total) $360,000                                           
Selling and administration costs:                                            
Variable 12% of sales                                           
Fixed (total) $470,000                                           
                                           
1. a. Compute the unit product cost under:                                            
i. absorption costing                                            
ii. variable costing                                           
b. Prepare an absorption costing income statement for September                                           
c. Prepare a contribution format income statement for September using variable costing.                                           
d. Assume that the company must obtain additional financing in order to continue operations. As a member of top management, would you prefer to rely n the statement in (b) above or in (3) above when meeting with a group of prospective investors?                                           
                                           
e. Reconcile the absorption costing and variable costing net operating incomes in (2) and (3) above.                                            

 

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