Reference no: EM132534219
Korona Company developed the following information for the product it sells:
Sales price $50 per unit
Direct materials $15 per unit
Direct labour $5 per unit
Variable manufacturing overhead $8 per unit
Fixed manufacturing overhead $550,000
Variable selling expense 10% of sales price
Fixed selling expense $500,000
Variable administrative expense $2 per unit
Fixed administrative expense $300,000
For the year ended 31 December 2019, Korona Company produced and sold 100,000 units of product.
Required:
Question (a) Calculate the unit production cost under variable costing and absorption costing.
Question (b) The marketing manager proposed to the President of Korona Company to introduce sales commissions of $3 per unit as an incentive for the sales staff. In exchange, the sales staff would accept an overall decrease in their salaries of $35,000 per month. The marketing manager predicts that introducing this sales incentive would increase annual sales by 2,400 units. Prepare contribution format variable costing income statements for Korona Company to show the overall effect on the company's net operating income before and after the adoption of the proposal.
Question (c) Advise the President whether the marketing manager's proposal should be adopted.
Question (d) Give examples of circumstances in which that Cost-Volume-Profit assumption is violated.
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