Question

The Alpha Company manufactures a single product. Its operations began on January 2, 2019. Its production capacity is 150,000 units per year. It is currently preparing to do its financial statements for the year ending December 31, 2019. The following information is related to the production and sale of its product:

Sale price per unit	16,20 $
Unit cost of raw material	2,70
Unit cost of direct labor	5,40
Variable manufacturing overheads per unit	2,03
Fixed manufacturing overheads	156 000 $
Variable selling and administration costs per unit	1,35
Fixed sales and administration costs	74 250 $

The Alpha Company produced and sold 130,000 units in 2019. In order to reward its managers, Alpha has established a bonus system that is based on bottom line.

Work to do:

1) Write the income statement using the full cost method and the variable cost method.

2) Suppose the Alpha Company produces 150,000 units instead in 2019 and its sales remain at 130,000 units. What effect will this change have on the bottom line of both methods? Demonstrate your calculations.

3) Reconcile the two results obtained in question 2.

4) Managers have the choice of calculating net profit using one or the other of two methods, either the full cost method or the variable cost method. If we got used to the data in 2) what method should managers choose knowing that their bonus depends on the deferred net profit? Why ?

Answer 1