Question

1. To determine the effect of different levels of production on the company’s income, move to cell B7 (Actual production). Change the number in B7 to the different production levels given in the table below. The first level, 100,000, is the current level. What happens to the operating income on both statements as production levels change? Enter the operating incomes in the following table.

Operating Income – January
	Production Level	Production Level	Production Level
	100,000	90,000	80,000
Absorption	$_______________	$_______________	$_______________
Variable	$_______________	$_______________	$_______________

Does the level of production affect income under either costing method? Explain your findings.

Data Section
Actual production in units	100,000
Sales in units	80,000
Sales price per unit	$30
Variable manufacturing costs per unit	$14
Variable selling costs per unit	$2
Fixed manufacturing costs	$315,000
Fixed selling expenses	$100,000
Answer Section
Income statement: Absorption costing
Sales		$2,400,000
Cost of goods sold:
Variable manufacturing costs	$1,400,000
Fixed manufacturing costs	315,000
Total goods available for sale	$1,715,000
Less ending inventory	343,000
Cost of goods sold		1,372,000
Gross profit		$1,028,000
Selling expenses:
Fixed selling expenses	$160,000
Variable selling expenses	100,000
Total selling expenses		260,000
Operating income		$768,000
Income statement: Variable costing
Sales		$2,400,000
Cost of goods sold:
Variable manufacturing costs	$1,400,000
Less ending inventory	280,000
Variable cost of goods sold		1,120,000
Manufacturing margin		$1,280,000
Variable selling expenses		FORMULA9
Contribution margin		$1,280,000
Fixed costs:
Fixed manufacturing costs	FORMULA10
Fixed selling expenses	100,000
Total fixed costs		100,000
Operating income		$1,180,000

Answer 1