Question

Security Technology Inc. (STI) is a manufacturer of an electronic control system used in the manufacture of certain special-duty auto transmissions used primarily for police and military applications. The part sells for $63 per unit and had sales of 24,400 units in the current year, 2018. STI has no inventory on hand at the beginning of 2018 and is projecting sales of 27,200 units in 2019. STI is planning the same production level for 2019 as in 2018, 25,800 units. The variable manufacturing costs for STI are $24, and the variable selling costs are only $0.60 per unit. The fixed manufacturing costs are $180,600 per year, and the fixed selling costs are $580 per year.

Required:

1. Prepare an income statement for each year using full costing.

2. Prepare an income statement for each year using variable costing.

3. Prepare a reconciliation of the difference each year in the operating income resulting from the full and variable costing methods.

Answer 1

	DOWELL COMPANY
	Full Costing Income statements
		27200 units-2019	24400-2018
	Sales($63 per unit*27,200)	$17,13,600	$15,37,200
Less:	Total Costs:
	Manufacturing Costs[$180,600+(27,200*$24)	$8,33,400	$7,66,200
	Selling costs[$580+(27,200*$0.60)	$16,900	$15,220
	Total Costs	$8,50,300	$7,81,420
	Net Income(Sales-Total Costs)	$8,63,300	$7,55,780
	DOWELL COMPANY
	Variable Costing Income statements
		27200 units-2019	24400-2018
	Sales($63 per unit*27,200)	$17,13,600	$15,37,200
Less:	Variable expenses:
	Manufacturing Costs	$6,52,800	$5,85,600
	Selling costs	$16,320	$14,640
	Total Variable expenses	$6,69,120	$6,00,240
	Contribution Margin	$10,44,480	$9,36,960
Less:	Fixed Expenses:
	Manufacturing Costs	$1,80,600	$1,80,600
	Selling costs	$580	$580
	Total Fixed expenses	$1,81,180	$1,81,180
	Net Income/(Loss)	$8,63,300	$7,55,780
	DOWELL COMPANY
	Reconicliation Statement for 2019
		Full Costing	Variable costing	Difference
	Net Income	$8,63,300	$8,63,300	$0
	DOWELL COMPANY
	Reconicliation Statement for 2018
		Full Costing	Variable costing	Difference
	Net Income	$7,55,780	$7,55,780	$0