BrwnPwr GrwnPwr, a privately held startup company, designs and manufacturers patented electrodes for electric-powered vehicle batteries. Grwa Pwr's patented electrodes allow battery makers to produce lighter and more powerul bulleries for electric vehicles (cars, trucks, heavy equipment, etc.) because of Grwawi's unique electrode design and chemical composition. Each electrode consists of a pro- pricury melul alloy that is precisely machined in a four-axis computer numerical controlled (CNC) gang mill that can produce the extremely tight tolerancer needed for lighter and more powerful batteries Battery manufacturers then assemble from three to six electrodes to form a complete battery unit. You work as a financial analyst for a private equity firm that is considering making a direct investment in Grwn.Pwe. Your boss has asked you to analyze the firm's current financial condition But before starting your analysis, your boss notices that GrwnPar is using variable costing rather than traditional absorption costing. During GewPwr's first year of operations, it produced and sold two different electrodes, the X759 model and the Z200 model. Grwn.Pwe's variable costing income statement for its first year of operations is provided below. Note there were so beginning inventories of modeis X759 and Z200 X759 7200 Total $537,500 (31,360) (32,480) Revenue Direct materials Direct labor Fixed manufacturing overhead Selling, general, admin expenses Net income before taxes $533,200 (31,820) (26,660) $1,070,800 (63,180) (59.140) (632,000) ($420,000) ($103,520) The foomotes to the financial statements read as follows: "Finished goods inventory under var able costing at year end consisted of $31,920 of X759 and $25,160 of Z200." Your boss isn't quite sure what the difference is between variable and absorption costing and doesn't know how the reported net income before taxes would change if GrwnPwr wed absorption costing. He asks you to prepare a statement showing what GrwnPwr's net income before tax would have been if it had used absorption costing. You contact GrwaPwr's CFO and learn the following additional facts: Each X759 electrode sold for $48. Each Z200 electrode sold for $62. Each X759 electrode required 13.5 minutes of milling time. Each 2200 electrode required 18.2 minutes of milling time. There is no variable overhead in Grwn.Pwr's manufacturing process. That is, manufacturing costs consist only of direct materials and labor (the variable costs) and fixed manufacturing overhead. Fixed manufacturing overhead consists entirely of lease payments on uiment, the factory rent, and other cash expenses. You conclude that muling minutss is the most appropriate way to absorb foxed manufactur- ing overhead to the electrodes. Required: a. Prepare a statement showing what Grwn.Pwr's net income hefore tax would have been if GrwnPwr had used absorption costing . Write a memo to your boss i explaining why the absorption costing and variable net income before tax amounts do or do not differ and (ii) discussing how your absorption costing set income before tax should (or should not) be used in your private equity firm's decision to invest in Grunwr. In particular, bow should your private equity firm's valua tion of Grwn Pwr change (or not change) based on your absorption costing statement pre- pared in part(a)? BrwnPwr GrwnPwr, a privately held startup company, designs and manufacturers patented electrodes for electric-powered vehicle batteries. Grwa Pwr's patented electrodes allow battery makers to produce lighter and more powerul bulleries for electric vehicles (cars, trucks, heavy equipment, etc.) because of Grwawi's unique electrode design and chemical composition. Each electrode consists of a pro- pricury melul alloy that is precisely machined in a four-axis computer numerical controlled (CNC) gang mill that can produce the extremely tight tolerancer needed for lighter and more powerful batteries Battery manufacturers then assemble from three to six electrodes to form a complete battery unit. You work as a financial analyst for a private equity firm that is considering making a direct investment in Grwn.Pwe. Your boss has asked you to analyze the firm's current financial condition But before starting your analysis, your boss notices that GrwnPar is using variable costing rather than traditional absorption costing. During GewPwr's first year of operations, it produced and sold two different electrodes, the X759 model and the Z200 model. Grwn.Pwe's variable costing income statement for its first year of operations is provided below. Note there were so beginning inventories of modeis X759 and Z200 X759 7200 Total $537,500 (31,360) (32,480) Revenue Direct materials Direct labor Fixed manufacturing overhead Selling, general, admin expenses Net income before taxes $533,200 (31,820) (26,660) $1,070,800 (63,180) (59.140) (632,000) ($420,000) ($103,520) The foomotes to the financial statements read as follows: "Finished goods inventory under var able costing at year end consisted of $31,920 of X759 and $25,160 of Z200." Your boss isn't quite sure what the difference is between variable and absorption costing and doesn't know how the reported net income before taxes would change if GrwnPwr wed absorption costing. He asks you to prepare a statement showing what GrwnPwr's net income before tax would have been if it had used absorption costing. You contact GrwaPwr's CFO and learn the following additional facts: Each X759 electrode sold for $48. Each Z200 electrode sold for $62. Each X759 electrode required 13.5 minutes of milling time. Each 2200 electrode required 18.2 minutes of milling time. There is no variable overhead in Grwn.Pwr's manufacturing process. That is, manufacturing costs consist only of direct materials and labor (the variable costs) and fixed manufacturing overhead. Fixed manufacturing overhead consists entirely of lease payments on uiment, the factory rent, and other cash expenses. You conclude that muling minutss is the most appropriate way to absorb foxed manufactur- ing overhead to the electrodes. Required: a. Prepare a statement showing what Grwn.Pwr's net income hefore tax would have been if GrwnPwr had used absorption costing . Write a memo to your boss i explaining why the absorption costing and variable net income before tax amounts do or do not differ and (ii) discussing how your absorption costing set income before tax should (or should not) be used in your private equity firm's decision to invest in Grunwr. In particular, bow should your private equity firm's valua tion of Grwn Pwr change (or not change) based on your absorption costing statement pre- pared in part(a)