Ben and Chris have been lifelong friends. They are engineer-minded and have always dreamed of starting a manufacturing company. They want to manufacture tires, but realize that this industry is heavily regulated and that achieving profitable operations will require skillful management. Despite the odds, they form Smooth Ride, Inc., and resolve to only stay in business if they report a positive net income after the company’s first year of operations. At the end of 2019, its first year of operations, Smooth Ride reported the following summarized data:

Required

a. Prepare income statements based on full absorption costing and based on variable costing. Based on the reported incomes using these methods, did Smooth Ride exceed the expectations of Ben and Chris?

b. Smooth Ride follows generally accepted accounting standards. Which method, full absorption or variable costing, will the company use to report its net income?

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Sales (105,000 tires) $13,125,000 Production costs (120,000 tires): Variable. Fixed.. Direct materials.. Direct labor... Manufacturing overhead: Operating expenses: Variable.. 4,750,000 3,675,000 2,300,000 950,000 1,050,000 Fixed.... 800,000 Depreciation on machinery.. 455,000 Property taxes 330,000 Personnel department expenses 140,000