Question

Jackson Company Produces plastic that is used for injection molding applications such as gears for small motors. In 2016, the first year of operations, Jackson produced 4,000 tons of plastic and sold 3,500 tons. In 2017, the production and sales results were exactly reversed. In each year, the selling price per ton was $2,000, variable manufacturing costs were 15% of the sales price of units produced, variable selling expenses were 10% of the selling price of units sold, fixed manufacturing costs were $2,800,000, and fixed administrative expenses were $500,000. Instructions

(A) Prepare income statements for each year using variable costing

(B) Prepare income statements for each year using absorption costing.

Answer 1

• All working forms part of the answer
• Working

	Year 1	Year 2
Produced	4000	3500
Sold	3500	4000
Sp per unit	2000	2000
Variable manufacturing cost	300	300
Variable selling expenses per unit	200	200
Fixed manufacturing cost	2800000	2800000
Units produced	4000	3500
Fixed manufacturing cost per unit	700	800
Production Costs:
Variable cost per unit	300	300
Fixed manufacturing cost per unit	700	800
Total production cost per unit	1000	1100

• Absorption costing Income Statement

	Year 1 ($)	Year 2 ($)
Sales	7000000	8000000
Less: Cost of Goods Sold
Opening Inventory		500000
Add: Production cost	[4000x1000] 4000000	[3500x1100] 3850000
Less: Ending inventory cost	500000	0
Cost of Goods Sold	3500000	4350000
Gross Profits	3500000	3650000
Less: Operating expenses
Variable selling expenses	700000	800000
Fixed administrative expenses	500000	500000
Net Income	$2300000	$2350000

• Variable costing Income statement

	Year 1 ($)	Year 2 ($)
Sales	7000000	8000000
Less: variable costs
variable production cost	1050000	1200000
variable selling & administrative cost	700000	800000
Total Variable cost	1750000	2000000
Contribution margin	5250000	6000000
Less; Fixed Costs
Fixed manufacturing cost	2800000	2800000
Fixed Selling & administrative cost	500000	500000
Total fixed cost	3300000	3300000
Net Income	$1950000	$2700000