Dance Creations manufactures authentic Hawaiian hula skirts that are purchased for traditional Hawaiian celebrations, costume parties, and other functions. During its first year of business, the company incurred the following costs: Variable Cost per Hula Skirt Direct materials $ 9.60 Direct labor 3.40 Variable manufacturing overhead 1.05 Variable selling and administrative expenses 0.40 Fixed Cost per Month Fixed manufacturing overhead $ 16,125 Fixed selling and administrative expenses 4,950 Dance Creations charges $30 for each skirt that it sells. During the first month of operation, it made 1,500 skirts and sold 1,375. Required: 1. Assuming Dance Creations uses variable costing, calculate the variable manufacturing cost per unit for last month. 2. Complete a variable costing income statement for the last month. 3. Assuming Dance Creations uses full absorption costing, calculate the full manufacturing cost per unit for the last month. 4. Complete a full absorption costing income statement. 6. Suppose next month Dance Creations expects to produce 1,500 hula skirts and sell 1,600. Without recreating the new income statements, calculate the difference in profit between variable costing and full absorption costing. Which would be higher

1. $14.05per unit

2. Contribution Margin $21,381

Net Operating Income $306

3.$24.08 per unit

4.Gross Margin $7,150

Net Operating Income $4,620

6. $1,075

Variable costing would be higher

Explanation:

1. Calculation to determine the variable manufacturing cost per unit for last month

Using this formula

Variable manufacturing cost per unit = Direct material + Direct labor + variable manufacturing overhead

Let plug in the formula

Variable manufacturing cost per unit= $9.60+3.40+1.05

Variable manufacturing cost per unit=$14.05per unit

Therefore Variable manufacturing cost per unit is $14.05per unit

2. Calculation to Complete a variable costing income statement for the last month

Variable costing income statement

Sales Revenue $41,250

($30*1,375)

Less: Variable cost per unit $19,869

1,375*($9.60+3.40+1.05+$0.4)

Contribution Margin $21,381

($41,250-$19,869)

Less: Fixed costs $21,075

($ 16,125+$4,950)

Net Operating Income $306

($21,381-$21,075)

Therefore the complete variable costing income statement for the last month will have Contribution Margn of $21,381 and Net Operating Income of $306

3. Calculation to determine the full manufacturing cost per unit for the last month

Using this formula

Full manufacturing cost per unit = Direct material + Direct labor + variable manufacturing overhead + Fixed manufacturing overhead per unit

Let plug in the formula

Full manufacturing cost per unit= $9.60+3.40+1.05+ $ 16,125/1,500

Full manufacturing cost per unit=$14.05+$10.75

Full manufacturing cost per unit=$24.08 per unit

Therefore the full manufacturing cost per unit for the last month is $24.08 per unit

4. Calculation to Complete a full absorption costing income statement

Absorption costing Income Statement

Sales Revenue $41,250

($30*1,375)

Less: Cost of Goods sold $34,100

($24.08*1,375)

Gross Margin $7,150

($41,250-$34,100)

Less: Selling expenses $2,530

($0.4*1,375+4,950)

Net Operating Income $4,620

($7,150-$2,530)

Therefore the Complete a full absorption costing income statement will have Gross Margin of $7,150 and Net Operating Income of $4,620

6. Calculation to determine the difference in profit between variable costing and full absorption costing.

Difference=(1,600-1,500)*($16,125/1,500)

Difference= 100*($16,125/1,500)

Difference=100*$10.75

Difference= $1,075

Therefore Variable costing would be higher $1,075