Hydro-Go makes insulated plastic bottles for bikes that the company sells for $4.00 each.

The following chart indicates production and sales [in units] for the prior two years:

Production Sales

2021 250,000 200,000

2022 200,000 250,000

Both years had the same costs: fixed manufacturing: $500,000 in total

variable manufacturing: $1 per bottle

The company president [not an MBA grad from Ottawa] is confused by the income statements for the two years the costs were the same each year and the product sold for the same price, sales increased in 2022, but income was lower.

How will you explain this to the president?

Required prepare income statements for each year to support your explanation.

Fixed Costs $ x # Units Sold

# Units Produced

This problem is solved using absorption costing. This is where the fixed costs are added into the units produced. It gets a bit tricky when you have finished goods inventory remaining in stock...like you didn't sell all you made.

To calculate the fixed costs that remain in inventory, you need to use the following formula as follows:

Fixed Costs $ x # Units in Inventory

# Units Produced