Question
Assume Stassen Company on January 1, 2018, decides to contract with another company to preassemble a large percentage of the components of its telescopes. The
Assume Stassen Company on January 1, 2018, decides to contract with another company to preassemble a large percentage of the components of its telescopes. The revised manufacturing cost structure during the 2018–2019 period is as follows:
Variable manufacturing cost per unit produced:
Direct materials $ 285
Direct manufacturing labor 15
Manufacturing overhead 10
Total variable manufacturing cost per unit produced $ $310
Fixed manufacturing costs $390,000
Under the revised cost structure, a larger percentage of Stassen’s manufacturing costs are variable for units produced. The denominator level of production used to calculate budgeted fixed manufacturing cost per unit in 2018 and 2019 is 9,500 units. Summary information pertaining to absorption-costing operating income and variable-costing operating income with this revised cost structure are as follows:
2018 2019
Absorption-costing operating income $1,600,000 $1,760,000
Variable-costing operating income $1,480,000 $1,850,000
Difference $120,000 $ (90,000)
Required:
1. Compute the budgeted fixed manufacturing cost per unit in 2018 and 2019.
2. Explain the difference between absorption-costing operating income and variable-costing operating income in 2018 and 2019, focusing on fixed manufacturing costs in beginning and ending inventory.
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