Question

Review the income statements on the Absorption Statement and Variable Statement panels, then complete the following table. The company’s sales price per unit is $75.00, and the number of units in ending inventory is 4,000.

Item	Amount
Number of units sold
Variable sales and administrative cost per unit
Number of units manufactured
Variable cost of goods manufactured per unit
Fixed manufacturing cost per unit

Absorption costing does not distinguish between variable and fixed costs. All manufacturing costs are included in the cost of goods sold.

Saxon, Inc.

Absorption Costing Income Statement

For the Year Ended December 31

1	Sales		$1,200,000.00
2	Cost of goods sold:
3	Beginning inventory	$0.00
4	Cost of goods manufactured	800,000.00
5	Ending inventory	(160,000.00)
6	Total cost of goods sold		640,000.00
7	Gross profit		$560,000.00
8	Selling and administrative expenses		305,000.00
9	Income from operations		$255,000.00

Under variable costing, the cost of goods manufactured includes only variable manufacturing costs. This type of income statement includes a computation of manufacturing margin.

Saxon, Inc.

Variable Costing Income Statement

For the Year Ended December 31

1	Sales		$1,200,000.00
2	Variable cost of goods sold:
3	Beginning inventory	$0.00
4	Variable cost of goods manufactured	560,000.00
5	Ending inventory	(112,000.00)
6	Total variable cost of goods sold		448,000.00
7	Manufacturing margin		$752,000.00
8	Variable selling and administrative expenses		240,000.00
9	Contribution margin		$512,000.00
10	Fixed costs:
11	Fixed manufacturing costs	$240,000.00
12	Fixed selling and administrative expenses	65,000.00
13	Total fixed costs		305,000.00
14	Income from operations		$207,000.00

Whenever the units manufactured differ from the units sold, finished goods inventory is affected. In analyzing income from operations, such increases and decreases could be misinterpreted as operating efficiencies or inefficiencies. Each decision-making situation should be carefully analyzed in deciding whether absorption or variable costing reporting would be more useful.

All costs are controllable in the long run by someone within a business. For a given level of management, costs may be controllable costs or noncontrollable costs.

The production manager for Saxon, Inc. is worried because the company is not showing a high enough profit. Looking at the income statements on the Absorption Statement panel and the Variable Statement panel, he notices that the net income is higher on the absorption cost income statement. He is considering manufacturing another 10,000 units, up to the company’s capacity for manufacturing, in the coming year. He reasons that this will boost net income and satisfy the company’s owner that the company is sufficiently profitable. Although the total units manufactured changes, assume that total fixed costs, unit variable costs, unit sales price, and the sales levels are the same. Complete questions (1)-(4) that follow. If the answer is zero, enter "0".

1. Use the income statements on the Absorption Statement and Variable Statement panels to complete the following table for the original production level. Then prepare similar income statements at a production level 10,000 units higher and add that information to the table. Assume that total fixed costs, unit variable costs, unit sales price, and the sales levels are the same at both production levels.

Income From Operations
Original	Original	Additional	Additional
Production	Production	10,000	10,000
Level-Absorption	Level-Variable	Units-Absorption	Units-Variable

2. What is the change in net income from producing 10,000 additional units under absorption costing?

3. What is the change in net income from producing 10,000 additional units under variable costing?

For planning and control purposes, managers often compare planned and actual contribution margin. Variable costing is used as a basis for such analyses.

Examine the following contribution margin data, and then complete the Contribution Margin Analysis panel.

Saxon, Inc.
Contribution Margin Data Schedule
	Actual	Planned
Sales	$1,200,000	$1,190,000
Variable cost of goods sold	$448,000	$462,000
Variable selling and administrative expenses	240,000	154,000
Total	$688,000	$616,000
Contribution margin	$512,000	$574,000
Number of units sold	16,000	14,000
Per unit:
Sales price	$75.00	$85.00
Variable cost of goods sold	28.00	33.00
Variable selling and administrative expenses	15.00	11.00

Contribution margin analysis focuses on explaining the differences between planned and actual contribution margins, considering the quantity factor and the unit price factor.

After reviewing the data on the Contribution Margin Data panel, complete the following contribution margin analysis. For those boxes in which you must enter subtracted or negative numbers use a minus sign.

Saxon, Inc.

Contribution Margin Analysis

For the Year Ended December 31

1	Planned contribution margin
2	Effect of changes in sales:
3	Sales quantity factor
4	Unit price factor
5	Total effect of changes in sales
6	Effect of changes in variable cost of goods sold:
7	Variable cost quantity factor
8	Unit cost factor
9	Total effect of changes in variable cost of goods sold
10	Effect of changes in selling and administrative expenses:
11	Variable cost quantity factor
12	Unit cost factor
13	Total effect of changes in selling and administrative expenses
14	Actual contribution margin

I got some of the work done just struggling with the rest

Answer 1

Item	Amount
Number of units sold	16000
Variable sales and administrative cost per unit	$15.00
Number of units manufactured	20000
Variable cost of goods manufactured per unit	$28.00
Fixed manufacturing cost per unit	$12.00

Working:

Sales	1200000
Unit selling price	$75.00
Unit sales	16000
Ending Inventory units	4000
Beginning Inventory	0
units manufactured	20000
Cost of goods manufactured - absorption costing	800000
Fixed manufacturing overheads	240000
Variable cost of manufacture	560000
Variable sales and administrative expenses	240000
Variable sales and admn. Cost per unit (240,000 / 16,000)	$15.00
Variable cost of manufacture per unit (560,000 / 20,000)	$28.00
Fixed manufacturing cost per unit (240,000 / 20,000)	$12.00

	Original		10,000 addtional prodn.
	Absorption	Variable	Absorption	Variable
Net income	255000	207000	319000	207000
The variable net income will not change as this is based on
variable costing, and sales units are the same under both the
production levels.
The difference between the net incomes is reconcilled as under:
Original production
Net income under variable costing				207000
Add: Fixed manufacturing carried				48000
over to next period by ending inventory
($12 x 4,000)
Net income under absorption costing				255000
Additional 10,000 units of production
The new production units will be				30000
Total fixed manufacturing overheads				240000
Fixed manufacturing overhead per unit				8
Ending inventory (30,000 - 16,000)				14000
Fixed manufacturing costs in ending inventory				112000
Net income under absorption costing (207,000 +112,000)					319000

SAXON Inc.
Contribution Margin analysis
For the year ended December 31
Planned contribution margin		574000
Effect of changes in sales
Sales quantity factor (2,000 x $75.00)	170000
Unit price factor ( -$10.00 x 16,000) *	-160000
Total effect of changes in sales		10000
Effect of changes in variable cost of goods sold
Variable cost quantity factor ( 2,000 x $33.00) **	-66000
Unit cost factor   (16,000 x $5.00)	80000
Total effect of changes in variable cost of goods sold		14000
Effect of changes in selling and administrative expenses
Variable cost quantity factor ( 2,000 x $11.00) **	-22000
Unit cost factor   (16,000 x -$4.00) ***	-64000
Total effect of changes in variable cost of goods sold		-86000
Actual contribution margin		512000
* Since the actual sale price is less than the plannned price, it is taken as negative.
** Since the actual quantity sold is higher than the planned, the cost will increase,
therefore negative amount.
*** Unit cost has increased by $4.00 as compared to planned per unit cost, therefore
negative amount.