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Louise started a company to produce and sell her innovative product. The following results were reported using absorption costing for the first two...

Louise started a company to produce and sell her innovative product. The following results were reported using absorption costing for the first two quarters of operation:
Qtr 1 Qtr 2
Sales ($16 per unit) $89,600 $86,400 Cost of goods sold (adjusted for volume variance) 65,200 58,100
Gross margin $24,400 $28,300
Selling & administrative expenses 16,400 16,100
Operating income (loss) $ 8,000 $12,200

Budgeted production 6,000 6,000
Actual production 5,800 7,000
Units sold 5,600 5,400
Additional cost information follows. Cost data remain the same for both quarters.
Manufacturing costs: Selling & administrative costs:
Direct materials $ 2.50 per unit Variable selling & admin. $1.50 per unit
Direct labor $ 3.00 per unit Fixed selling & admin. $8,000
Variable mfg overhead $ 2.00 per unit
Fixed mfg overhead $ 4.00 per unit
Total manufacturing cost $11.50 per unit

a. Louise is reviewing the statements for the two quarters and is bewildered by the second quarter results. She says, “The selling price and costs remained the same, but we sold fewer units and income went up! How can this be?!” Explain to Louise why income went up in the second quarter when fewer units were sold.

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