2 year 1 year 2 year 3 sales 80000 100000 120000 less

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Unformatted text preview: Year 2). 2. Year 1 Year 2 Year 3 Sales $ 80,000 $100,000 $120,000 Less variable expenses: Cost of goods sold (31,200) (40,000) (47,800) Selling expense (3,200) (5,000) (6,000) Contribution margin $ 45,600 $ 55,000 $ 66,200 Less fixed expenses: Fixed overhead (29,000) (30,000) (30,000) Other fixed costs (9,000) (10,000) (10,000) Net income $ 7,600 $ 15,000 $ 26,200 $ 5,800a 0 $ 5,800 FOH, ending inventory FOH, beginning inventory Change in fixed overhead a $2.90 × 2,000 units ($3.00 × 1,000 units) + $5,800 b 341 $ $ 8,800b 5,800 3,000 $ $ 0 8,800 8,800 The difference between the absorption- and variable-costing incomes is due to the change in fixed overhead in the division’s inventories. In Year 1, $5,800 of the fixed overhead went into inventory; so, absorption-costing income exceeds variable-costing income by $5,800. In Year 2, $3,000 more fixed overhead was inventoried, and absorption-costing income was $3,000 greater than variable-costing income. However, in Year 3, the inventory was sold, and absorption-costing income now recognizes that additional $8,800 of fixed overhead ($5,800 + $3,000), explaining why variable-costing income is greater by this amount. 3. Since variable-costing income provides an increase in income when sales increase and costs do not change, the company vice president would have preferred variable costing. Variable costing would have provided the expected bonus to the divisional manager and a consistent signal of improved performance. 10–32 1. The transfer price based on variable manufacturing costs to produce the cushioned seat and the Office Division’s opportunity cost is $1,869 for a 100unit lot, or $18.69 per seat as summarized below: Variable cost ......................................................... Opportunity cost .................................................. Transfer price ....................................................... Variable cost: Cushioned material: Padding.................................................
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