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5-BI Contribution and Absorption Income Statements
The following information is taken from the records of the Zealand Manufacturing Company for the
year ending December 31, 2012. There were no beginning or ending inventories.
Sales
$14,000,000 Long-term rent, factory
$ 85,000
Sales commissions
470,000
Advertising
430,000 Factory superintendent's salary
31,000
Shipping expenses
320,000 Factory supervisors' salaries
105,000
Direct materials used
3,500,000
Administrative executive salaries
100,000
Direct labor
1,700,000
Cutting bits used
53,000
Administrative clerical salaries (variable)
370,000 Factory methods research
42,000
Abrasives for machining
99,000
Fire insurance on factory equipment
4,000
Indirect labor
950,000
Property taxes on factory equipment
26,000
Depreciation on factory equipment
430,000
1. Prepare a contribution income statement and an absorption income statement. If you are in doubt
about any cost behavior pattern, decide on the basis of whether the total cost in question will
fluctuate substantially over a wide range of volume. Prepare a separate supporting schedule of
indirect manufacturing costs subdivided between variable and fixed costs.
2. Suppose that all variable costs fluctuate directly in proportion to sales, and that fixed costs are
unaffected over a wide range of sales. What would operating income have been if sales had
been $12 million instead of $14 million? Which income statement did you use to help get your
answer? Why?

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