Lake Michigan Fabricating Company (LMFC) employs an absorption-costing system for external reporting and internal management purposes. The

Question:

Lake Michigan Fabricating Company (LMFC) employs an absorption-costing system for external reporting and internal management purposes. The latest annual income statement follows:
SHIOSICVeT Wow emtaat fate doe iinet crvmelwen’ ca awitncend fact $465, 000 C o s t o f g o o d s s o l d : B e g i n n i n g f i n i s h e d - g o o d s i n v e n t o r y . . . . . . . . . . . . . . .5$ 22,000*
Cost of goods manufactured .-............0....0. 315,000 ‘ Ending finished-goods inventory ...............00. (86,000)"
Costonooodesol cl: ep kvatencs eres. oA Meet orld ev tal dln 251,000 GrOSSiMani es scieoads sled pobssrtteisay donb amen net toaborey vaste be $214, 000 S C I U I M O I C O S I S a r t e a c i a n c g . f e s a a M A P A) S E H D C o M E O E a s 483, 000 E N G I N S i a N E l C O S t G b o a t s S a c k H a r e m a r i a t e i n s c d a a h m a d o s a r e a s 49, 800 O p e r a t i n g a r o i i t i p e t o r s t a x e s . . . « 254... 7 e e 47.11 S e M E O e t h S a e l t) t e$ 81,200 “Includes $9, 900 v a r i a b l e c o s t s . ‘ I n c l u d e s$ 60,200 variable costs.
Management is somewhat concerned that although LMFC is showing adequate income, it is short of cash to meet operating costs. The following information has been provided to assist management with its evaluation of the situation:
Schedule of Cost of Goods Manufactured Direct material:
BOM GUV ENOGY maurnee weatery nabet. as h ese $16, 000 P U N O E S S a c e r a e G e e n e e F i n a e e 62, 000 E M C I M O U I M V E R I O N V : R O O M E E R : S o . 5 G e r a c e a k a d C o e n s U s (22, 000)$ 56,000 TIREC TE) Ot Rem e cxe ne RNA AR or rod chaskircnc ov REM de md ghee oan chy 125,100 Manufacturing overhead:
Nariel Serene A ROMS ie tn cc fk era hee ae 39,400 Fixed(ineludingidepreciation.of $30; 000)) . s y . a n s . . e . e e e e 94, 500 C O S T O M J O O C S I M a A M E T A C T U T C O I G 2.4 c i a u s t B a n k Q e d a e H r d o s e e A D$ 315,000 There are no work-in-process inventories. Management reports that it is pleased that this year’s manufacturing costs are 70 percent variable compared to last year’s costs when they were only 45 percent variable. Although 80 percent of the selling costs are variable, only 40 percent of the administrative costs are considered variable. The company uses the first-in, first-out (FIFO) inventory method.
Required

a. Prepare a variable-costing income statement for the year.

b. Write a short report to management that explains why the company might be experiencing a cashflow shortage despite the adequate income shown in its absorption-costing income statement.
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(a) and (b).

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