Aspen View produces a full line of sunglasses. This year it began producing a new model of sunglasses, the Peak 32. It produced 5,300 pairs and sold 4,900 pairs. The following table summarizes the fixed and variable costs of producing Peak 32 sunglasses. Aspen View uses variable costing to value its ending inventory.

Required:
a. What is Aspen View's ending inventory value of Peak 32 sunglasses?
b. Aspen View is considering switching from variable costing to absorption costing. Would this year's net income from Peak 32 sunglasses be higher or lower using absorption costing? Explain.
c. Suppose Aspen View uses absorption costing. If, instead of producing 5,300 pairs of Peak 32s it produced only 5,000, would net income from Peak 32 sunglasses be higher or lower from the smaller production compared to the larger production? Explain.
d. Aspen View has an opportunity cost of capital of 20 percent. What is the cost of producing 5,300 pairs of Peak 32s instead of 4,900 pairs?

Transcribed Image Text:

Variable Cost Total Cost Fixed Cost $ 3.50 $ 3.50 Direct labor Direct material 7.50 7.50 Manufacturing overhead Advertising $3.20 4.50 7.70 1.20 1.70 2.90 Distribution .70 .25 .95 Selling 1.20 .90 2.10 $18.35 Total cost $6.30 $24.65