Based on the content covered in Week 2 and Chapters 18 and 19 of the Wild, J., & Shaw, K. (2022) text, students learned about cost behavior, cost-volume-profit analysis, and variable costing. Students should address the following:

1. Describe how use of absorption costing in determining income can lead to overproduction and a buildup of inventory. Explain how variable costing can avoid this same problem.
2. Apply your knowledge of absorption costing and variable costing to solve the following problem:

Sims Company, a manufacturer of tablet computers, began operations on January 1, 2017. Its cost and sales information for this year follows.

Manufacturing costs Direct materials . . .... $40 per unit Direct labor. . . . .. $60 per unit Overhead costs for the year Variable overhead .... . . . $3,000,000 Fixed overhead .... . . . $7,000,000 Selling and administrative costs for the year Variable. . . . .. $770,000 Fixed . . . . . . . . $4,250,000 Production and sales for the year Units produced. . .... . . . 100,000 units Units sold . ..... 70,000 units Sales price per unit $350 per unit