Question

Eagle Technologies is concerned that increased sales did not result in increased profits for 2018.

Both variable unit and total fixed manufacturing costs for 2017 and 2018 remained constant at $35 and $3,500,000, respectively.

In 2017, the company produced 100,000 units and sold 80,000 units at a price of $87.50 per unit. There was no beginning inventory in 2017. The budgeted number of units for fixed costs are 100,000. In 2018, the company made 70,000 units and sold 90,000 units at a price of $87.50. Selling and administrative expenses were all fixed at $350,000 each year.

Hint: Ending inventory in 2018 is 0 – all fixed costs would thus be allocated.

Required:

a. Prepare income statements for each year using absorption costing.

b. Prepare income statements for each year using variable costing.

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a. Absorption-costing income statements:

2017 ------------------------ 2018

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b. Variable-costing income statements:

2017 ------------------------------ 2018

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Answer 1

Income Statement under
Absorption Costing
Particulars			2017	Workings	2018	Workings
Sales			$ 7,000,000.00	(80000 x $ 87.5)	$ 7,875,000.00	(90000 x $ 87.5)
Cost of Goods sold			$ 5,600,000.00	(80000 x $ 70)	$ 7,350,000.00	[(20000 x $ 70) + (70000 x $ 85)]
Gross Margin			$ 1,400,000.00		$     525,000.00
Selling and Adm. Expenses			$    350,000.00		$     350,000.00
Net Operating Income			$ 1,050,000.00		$     175,000.00
Variable Costing
Particulars			2017	Workings	2018	Workings
Sales			$ 7,000,000.00	(80000 x $ 87.5)	$ 7,875,000.00	(90000 x $ 87.5)
Variable Costs			$ 2,800,000.00	(80000 x $ 35)	$ 3,150,000.00	(90000 x $ 35)
Contribution Margin			$ 4,200,000.00		$ 4,725,000.00
Fixed Expenses:
Fixed Manu. OH			$ 3,500,000.00		$ 3,500,000.00
Fixed Selling and Adm. Exp			$    350,000.00		$     350,000.00
Total Fixed Expenses			$ 3,850,000.00		$ 3,850,000.00
Net Operating Income			$    350,000.00		$     875,000.00

Is this okay?

Workings:
Computation of Unit Product Cost under
Absorption Costing
Particulars			2017	Workings	2018	Workings
Variable Unit cost			$   35.00	(Given)	$   35.00	(Given)
Fixed OH unit cost			$   35.00	($ 3500000 / 100000)	$   50.00	($ 3500000 / 70000)
			$   70.00		$   85.00