Question

3. Sit Down, Corp. is a chair manufacturer that reports the following information from the current period for its product.

Sales price per unit	$80 per unit
Manufacturing costs incurred this period:
DM	$21 per unit
DL	$13 per unit
Variable OH	$18 per unit
Fixed OH	$250,000 per period
Non-Manufacturing (i.e. Selling and Administrative) costs incurred this period:
Variable S&A	$3 per unit
Fixed S&A	$144,500 per period
Units in finished goods inventory, beginning of the month	0 units
Units produced this month	40,000 units
Units sold this month	40,000 units

PARTA:

1. Calculate net income for the period company using absorption costing.
2. Calculate net income for the period company using variable costing.

PARTB: Suppose Sit Down decides to increase its production to 100,000 units (assume the firm has enough excess capacity to produce the 100,000 units) but continues to sell 40,000 units.

1. Calculate net income for the period company using absorption costing at this new 100,000 unit level of production.
2. Compare your answer in PARTB, 1) to your answer in PARTA, 1). By how much did net income change under absorption costing?
3. Calculate net income for the period company using variable costing at this new 100,000 unit level of production.
4. Compare your answer in PARTB, 3) to your answer in PARTA, 2). By how much did net income change under variable costing?

Answer 1

PART-A

1. Net income for the period company using absorption costing is $605,500

2. Net income for the period company using variable costing is $605,500

PART-B

1. Net income for the period company using absorption costing at this new 100,000 unit level of production is $755,500

2. $150,000 ($755,500 - $605,500) net income change under absorption costing.

3. Net income for the period company using variable costing at this new 100,000 unit level of production is $605,500

4.$0 ($605,500 - $605,500) net income change under variable costing.

PART-A 1.

Absorption Costing Income Statement

Sales	$3,200,000
Cost of goods sold ($58.25 40,000 units sales)*	2,330,000
Gross margin	870,000
Selling and administrative expenses	264,500
Net operating income	$605,500

Absorption Unit Product Cost

Direct materials	$21
Direct labors	13
Variable manufacturing overhead	18
Fixed manufacturing overhead ($250,000 40,000 units produced during the current period)	6.25
Absorption costing unit product cost	$58.25

PART-A 2.

Variable Costing Income Statement

Sales		$3,200,000
Variable expenses
Variable cost of goods sold	2,080,000
Variable selling and administrative expenses	120,000
Total variable expense		2,200,000
Contribution margin		1,000,000
Fixed expenses
Fixed manufacturing overhead	250,000
Fixed selling and administrative expenses	144,500
Total fixed expenses		394,500
Net Income		$605,500

Variable Costing Unit Product Cost

Direct materials	$21
Direct labor	13
Variable manufacturing overhead	18
Variable costing unit product cost	$52

Variable production cost	$52
Units sold	40,000
Variable cost of goods sold	$2,080,000

PART-B 1.

Absorption Costing Income Statement

Sales	$3,200,000
Cost of goods sold	2,180,000
Gross margin	1,020,000
Selling and administrative expenses	264,500
Net operating income	$755,500

PART-B 2.

Variable Costing Income Statement

Sales		$3,200,000
Variable expenses
Variable cost of goods sold	$2,080,000
Variable selling and administrative expenses	120,000
Total variable expenses		2,200,000
Contribution margin		1,000,000
Fixed expenses
Fixed manufacturing overhead	250,000
Fixed selling and administrative expenses	144,500
Total fixed expenses		394,500
Net operating		605,500