Question

Gibson Manufacturing pays its production managers a bonus based on the company’s profitability. During the two most recent years, the company maintained the same cost structure to manufacture its products.

Year	Units Produced			Units Sold
Production and Sales
Year 2		4,000			4,000
Year 3		6,000			4,000
Cost Data
Direct materials				$	13.50	per unit
Direct labor				$	22.90	per unit
Manufacturing overhead—variable				$	11.10	per unit
Manufacturing overhead—fixed				$	102,600
Variable selling and administrative expenses				$	8.00	per unit sold
Fixed selling and administrative expenses				$	58,000

(Assume that selling and administrative expenses are associated with goods sold.)

Gibson sells its products for $109.50 per unit.

Required

a Prepare income statements based on absorption costing for Year 2 and Year 3.

b Since Gibson sold the same number of units in Year 2 and Year 3, why did net income increase in Year 3?

4. Determine the costs of ending inventory for Year 3.

5. Prepare income statements based on variable costing for Year 2 and Year 3.

A, Year 2

	GIBSON MANUFACTURING Absorption Costing Income Statement. For the Year Ended Dec. 31, Year 2    Cost of Goods Sold: 0 0 $0

A, Year 3

	GIBSON MANUFACTURING Absorption Costing Income Statement. For the Year Ended Dec. 31, Year 3    Cost of Goods Sold: 0 0 $0

B:

	Why did net income increase in Year 3?:

D.

	Ending inventory

E. Year 2

	GIBSON MANUFACTURING Variable Costing Income Statement. For the Year Ended Dec. 31, Year 2 Variable costs: 0 0 $0

E. Year 3

	GIBSON MANUFACTURING Variable Costing Income Statement    For the Year Ended Dec. 31, Year 3    Variable costs: 0 0 $0

Answer 1

answer A year 2

answer A year 3

answer : B ) net income increase in the year 3 because of fixed manufacturing overhead differed in ending inventory

unit sold is less than produced so operating income is increased

D ) ENDING INVENTORY = ending inventory units *unit product cost year 3 = 2000 * 65 = $130,000

answer E year 2

answer E year 3