Question

XY Company uses actual absorption costing. The operating data follows:

Selling Price (per unit)                                               $1000

Unit Variable Manufacturing Costs                   150

Unit Variable Marketing Cost                            350

Fixed Manufacturing Costs                                400

All costs are on per unit basis. There are no other costs:

Required:

1. What is the effect on net income if sales goes up by 1 unit with no change in production? *Show with income statement (1 points)
2. What is the effect on net income if production goes up by 1 unit with no change in sales? *Show with income statement(1 points)
3. Explain the difference in the effects.                                                                                                  (2 point)

Answer 1

Part-1 - Income as per Absorption Costing Income Statement - XYZ Company
	Existing	Sales Goes up by 1 Unit
Sales	$1,000.00	$2,000.00
Less : Cost of Goods Sold
Variable Manufacturing Cost	$150.00	$300.00
Fixed Manufacturing Cost	$400.00	$400.00
Gross Profit	$450.00	$1,300.00
Less: Variable Marketing Cost	$350.00	$700.00
Net Operating Income	$100.00	$600.00
The Net income will be increased by $500 due to sales goes up by 1 unit with no change in production
Part-2 - Income as per Absorption Costing Income Statement - XYZ Company
	Existing	Production Goes up by 1 Unit
Sales	$1,000.00	$1,000.00
Less : Cost of Goods Sold
Variable Manufacturing Cost	$150.00	$150.00
Fixed Manufacturing Cost (400/2)	$400.00	$200.00
Gross Profit	$450.00	$650.00
Less: Variable Marketing Cost	$350.00	$350.00
Net Operating Income	$100.00	$300.00
The Net income will be increased by $200 due to Production goes up by 1 unit with no change in sales