The annual data that follow pertain to Aquatic Optics, a manufacturer of swimming goggles (the company has no beginning inventory):

Sales price ……………………………………………………………………. $ 47

Variable manufacturing expense per unit …………………………. $ 16

Sales commission expense per unit …………………………………… $ 5

Fixed manufacturing overhead …………………………….. $2,000,000

Fixed operating expense ……………………………………….. $ 260,000

Number of goggles produced …………………………………… 200,000

Number of goggles sold ………………………………………….. 192,000

Requirements

1. Prepare both conventional (absorption costing) and contribution margin (variable costing) income statements for Aquatic Optics for the year.

2. Which statement shows the higher operating income? Why?

3. The company’s marketing vice president believes a new sales promotion that costs $155,000 would increase sales to 200,000 goggles. Should the company go ahead with the promotion? Give your reason.



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