Question
Electricoil is a division of Meier Products Corporation. The division manufactures and sells an electric coil used in a wide variety of applications. During the
Electricoil is a division of Meier Products Corporation. The division manufactures and sells an electric coil used in a wide variety of applications. During the coming year, it expects to sell 200,000 units for $9 per unit. Mark Barnes is the division manager. He is considering producing either 200,000 or 250,000 units during the period. Other information is presented in the schedule.
Division Information for 2017
Beginning inventory 0
Expected sales in units 200,000
Selling price per unit $9
Variable manufacturing costs per unit $3
Fixed manufacturing overhead costs (total) $500,000
Fixed manufacturing overhead costs per unit:
Based on 200, units $2.50 per unit ($50,000 200,000)
Based on 250, units $2.00 per unit ($500,000 250,000)
Manufacturing costs per unit:
Based on 200, units $5.50 per unit ($3 variable + $2.50 fixed)
Based on 250, units $5.00 per unit ($3 variable + $2.00 fixed)
Variable selling and administrative expense $0.40
Fixed selling and administrative expense (total) $15,000
Instructions
(a) Prepare an absorption costing income statement, with one column showing the results if 200 units are
produced and one column showing the results if 250,000 units are produced.
(b) Prepare a variable costing income statement, with one column showing the results if 200,000 units are
produced and one column showing the results if 250,000 units produced.
(c) Reconcile the differences in net incomes under the two approaches and explain what accounts for this
difference.
(d) Discuss the relative usefulness of the variable costing income statements versus the absorption costing
income statements for decision making and for evaluating the managers performance.
ELECTRICOIL DIVISION
Income Statement
For the Year Ended December 31, 2017
Absorption Costing
| (a) | 200,000 Produced | 250,000 Produced |
| Sales | 1,800,000 | 1,800,000 |
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| Net Income |
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ELECTRICOIL DIVISION
Income Statement
For the Year Ended December 31, 2017
Variable Costing
| (b) | 200,000 Produced | 250,000 Produced |
| Sales | 1,800,000 | 1,800,000 |
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| Net Income |
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| (c)
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