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Problem 5.4 (LO1, 2) Variable and Full Costing: Earnings Management with Full Costing; Changes in Production...

Problem 5.4 (LO1, 2) Variable and Full Costing: Earnings Management with Full Costing; Changes in Production and Sales Sampson Steel produces high-quality worktables. The company has been in operation for three years, and sales have declined each year due to increased competition. The following information is available:

2020

2021

2022

Total

Units sold

10,000

9,000

8,000

27,000

Units produced

10,000

10,000

7,000

27,000

Fixed production costs

$350,000

$350,000

$350,000

Variable production costs per unit

$100

$100

$100

Selling price per unit

$350

$350

$350

Fixed selling and administrative expenses

$300,000

$300,000

$300,000

Required

  1. Calculate profit and the value of ending inventory for each year under full costing.
  2. Calculate profit and the value of ending inventory for each year under variable costing.
  3. Explain how management of Sampson could manipulate earnings in 2021 by producing more units than are actually needed to meet demand. Could this approach to earnings management be repeated year after year?

Solutions

Expert Solution

ekkarill92 answered 8 months ago
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