Double Edge Ltd.

Double Edge Ltd. (DE) is a privately owned company that builds residential homes. Specifically, it builds factory-built homes before delivering them to customers. These homes are considered a quality alternative to site-built homes. The company offers several models of prefabricated homes and customers can also adapt them to their tastes and preferences (for example, choice of floor finish, choice of mouldings, etc.).

These homes offer buyers several advantages, including a lower purchase price than site-built homes, the choice of finishes that suit them, the ease with which they can be moved if necessary and lower operating costs. This type of home also saves time since it can be built in two or three months compared to several months for a site-built home.

DE's factory is located in Springfield. They have recently upgraded and increased their production capacity allowing them to produce twice as many units as before. The company currently employs 325 employees.

The company operates a network of representatives across Canada. These representatives meet with customers, accompany them on show home visits, take their orders and handle after-sales services such as resale of the homes. DE manufactures model homes that it keeps in inventory as well as homes ordered by customers. The prefabricated homes can be built in four sizes: 16 feet, 20 feet, 22 feet and 24 feet.

The managers at ED decided to use variable costing to better understand how their business operates. They realize that in some businesses, managers manipulate profits by producing more than they can sell in order to increase their profit. In the prefabricated housing industry, overproduction of units is not good for the business. Since it is not possible to manipulate profits with the variable cost method, management has asked you to prepare a variable cost income statement and a full cost income statement for the company's last quarter. They would like to know the main differences between the two financial statements, including the cost per unit of manufacturing under the two scenarios requested, as well as a reconciliation of the net income between the two methods. Finally, they would like to know the number of units required and the sales required to cover the costs for the period. Additional information on the 4th quarter is presented in Appendix 1.

Required work:

1. a) Calculate the unit manufacturing cost using the variable cost method and the full cost method.

b) Prepare an income statement using the variable cost method and the full cost method. See Appendix 1 on the next page for information.

2. What are the differences between the two methods?

3. Write a variable cost and a full cost income statement assuming that 460 units are produced but only 400 units are sold (additional assumptions: there are no houses in inventory at the beginning and assume that variable selling and administrative expenses do not change despite the change in sales). You should also attempt to reconcile the net income under both methods.

4. Referring to question 1, what is the number of units required under the full cost method to cover costs for the period? (See the definition of period cost on page 72 of the manual. Essentially, the costs of the period are the selling and administrative costs.

Appendix 1

Additional Information

Units produced 460

Units sold 460

Average unit selling price $143,000

Raw materials $13,800,000

Direct labor $18,400,000

Variable manufacturing overhead $9,200,000

Variable selling and administrative expenses $2,300,000

Fixed selling and administrative expenses $6,900,000

Fixed manufacturing overhead $9,200,000