Variable manufacturing costs are $103 per unit, and fixed manufacturing costs are $162,000. Sales are estimated...

Variable manufacturing costs are $103 per unit, and fixed manufacturing costs are $162,000. Sales are estimated to be 7,500 units.

If an amount is zero, enter "0". Do not round interim calculations. Round final answer to nearest whole dollar.

a. How much would absorption costing income from operations differ between a plan to produce 7,500 units and a plan to produce 9,000 units?
$

b. How much would variable costing income from operations differ between the two production plans?
$

Expert Solution

a.
Under absorption costing, the fixed manufacturing cost per unit is added to the cost of production. It may cause difference in the value of ending inventory when the production plan is changed.

Fixed manufacturing cost per unit at production level of 7,500 units = Fixed manufacturing cost / Production level = $162,000 / 7,500 = $22.60

Fixed manufacturing cost per unit at production level of 9,000 units = Fixed manufacturing cost / Production level = $162,000 / 9,000 = $18.00

Estimated sales is 7,500 units. Therefore, ending inventory if 9,000 units are produced = 9,000 - 7,500 = 1,500

In case, the company produces 9,000 units, the fixed manufacturing overhead deferred in ending inventory = 1,500 × $18 = $27,000

Therefore, Absorption costing income will differ by $27,000 from a plan to produce 7,500 units and a plan to produce 9,000 units.

Difference in absorption costing income under two production plans = $27,000.

b.
Under variable costing, the income from operations is calculated by separating variable expenses and fixed expenses. Fixed expenses are charged as period costs under this method. Therefore, the fixed manufacturing overhead will not be deferred in ending inventory. Therefore, variable costing income will not differ between two production plans.

Difference in variable costing income under two production plans = $0

ekkarill92 answered 1 year ago

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