Question

Shawnee Motors Inc. assembles and sells snowmobile engines. The company began operations on August 1 and operated at 100% of capacity during the first month. The following data summarize the results for August:

1	Sales (33,000 units)		$8,250,000.00
2	Production costs (40,500 units):
3	Direct materials	$3,240,000.00
4	Direct labor	1,822,500.00
5	Variable factory overhead	1,012,500.00
6	Fixed factory overhead	607,500.00	6,682,500.00
7	Selling and administrative expenses:
8	Variable selling and administrative expenses	$1,160,000.00
9	Fixed selling and administrative expenses	230,000.00	1,390,000.00

	Required:
a.	Prepare an income statement according to the absorption costing concept.*
b.	Prepare an income statement according to the variable costing concept.*
c.	What is the reason for the difference in the amount of income from operations reported in (a) and (b)? * Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. Be sure to complete the statement heading. A colon (:) will automatically appear if it is required. Enter all amounts as positive numbers.

Answer 1

a) Absorption Costing per unit = 6682500/40500 = $165 per unit

Sales	8250000
Less; Cost of goods sold (33000*165)	-5445000
Gross profit	2805000
Less: Selling and administrative expense	-1390000
Net operating income	1415000

b) Variable cost of goods sold per unit = (6682500-607500)/40500 = 150 per unit

Sales		8250000
Less: Variable cost of goods sold (33000*150)		-4950000
Manufacturing margin		3300000
Less: Variable selling and administrative expense		-1160000
Contribution margin		2140000
Less: Fixed cost
Fixed manufacturing overhead	607500
Fixed selling and administrative expense	230000
Total fixed cost		-837500
Net operating income		1302500

3) Reason of difference in both operating income is Fixed manufacturing overhead deferred in ending inventory (607500/40500) = $15 per unit Difference in units = (40500-33000) = $7500 Fixed manufacturing overhead deferred = 7500*15 = 112500