Reference no: EM13579736

Sandi Scott obtained a patent on a small electronic device and organized Scott Products, Inc., to produce and sell the device. During the first month of operations, the device was very well received on the market, so Ms.Scott looked forward to a healthy profit. For this reason, she was surprised to see a loss for the month on her income statement.This statement was prepared by her accounting service, which takes great pride in providing its clients with timely financial data. The statement follows:

Scott Products, Inc. Income Statement
Sales (21,000 units)			$	762,300
Variable expenses:
Variable cost of goods sold	$	245,700
Variable selling and administrative expenses		164,850		410,550
Contribution margin				351,750
fixed expenses:
Fixed manufacturing overhead		201,600
Fixed selling and administrative expenses		216,000		417,600
Net operating loss			$	( 65,850)

Ms. Scott is discouraged over the loss shown for the month, particularly because she had planned to use the statement to encourage investors to purchase stock in the new company. A friend, who is a CPA, insists that the company should be using absorption costing rather than variable costing. He argues that if absorption costing had been used, the company would probably have reported a profit for the month.

Selected cost data relating to the product and to the first month of operations follow:

Units produced		24,000
Units sold		21,000
Variable costs per unit:
Direct materials	$	7.30
Direct labor	$	2.90
Variable manufacturing overhead	$	1.50
Variable selling and administrative expenses	$	7.85

Required:

1.	Complete the following: