Question
Business Decision Case Ben and Chris have been lifelong friends. They are engineer-minded and have always dreamed of starting a manufacturing company. They want to
Business Decision Case 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 companys first year of operations. At the end of 2016, its first year of operations, Smooth Ride reported the following summarized data:
Sales (105,000 tires)....................................... $13,125,000
Production costs (120,000 tires):
Direct material.......................................... 4,750,000
Direct labor ............................................ 3,675,000
Manufacturing overhead:
Variable ............................................... 2,300,000
Fixed ................................................. 950,000
Operating expenses:
Variable ............................................... 1,050,000
Fixed ................................................. 800,000
Depreciation on machinery ................................. 455,000
Property taxes ........................................... 330,000
Personnel department expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140,000
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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