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When should a company use absorption costing when setting sales prices? When should it use variable costing?

Short Answer

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Answer

Absorption costing should be used for long-term planning while variable costing is used for short-term planning.

Step by step solution

01

Use of absorption costing

Absorption costing should be used when the sales price is calculated for long-term planning because it is important to include fixed manufacturing overhead.

02

Use of variable costing

Variable costing should be used for short-term projects because in short-term projects fixed costs are sunk costs and irrelevant in decision making.

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Most popular questions from this chapter

When units produced exceed units sold, how does operating income differ between variable costing and absorption costing? Why?

Why is it appropriate to use variable costing when planning production in the short term?

Analyzing profitability

Relative Furniture Company manufactures and sells oak tables and chairs. Price and cost data for the furniture follow:

Tables Chairs

Sales Price \( 1,400 \) 50

Variable manufacturing costs 1,148 21

Sales commission (8%) 112 4

Relative Furniture has three sales representatives: Abe, Brett, and Corrin. Abe sold 50 tables with 4 chairs each. Brett sold 110 tables with 6 chairs each. Corrin sold 90 tables with 8 chairs each.

Requirements:

  1. Calculate the total contribution margin and the contribution margin ratio for each sales representative (round to two decimal places).
  2. Which sales representative has the highest contribution margin ratio? Explain why.

Using variable costing, service company Refer to Exercise E21-25. The commercial business segment provided services to 200 customers. The residential business segment provided services to 400 customers. Determine the average amount Sherman Company charged each type of customer for services, the average variable cost per customer, and the average contribution margin per customer, rounded to two decimal places. What caused the difference in contribution margin in the two segments?

Analyzing profitability Sampler Company sells two products, Sigma and Zeta, with a sales mix of 70% and 30%, respectively. Sigma has a contribution margin per unit of \(26, and Zeta has a contribution margin per unit of \)21. The company sold 700 total units in September. Calculate the total amount each product contributed to the coverage of fixed costs and the total contribution margin for the company.

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