Question
Joan Keathley has been trying to convince her boss, Jeff Hamilton, to use variable costing for internal reporting purposes. If we could predict demand better,
Joan Keathley has been trying to convince her boss, Jeff Hamilton, to use variable costing for internal reporting purposes. If we could predict demand better, it wouldnt be an issue, argued Joan. Jeff doesnt think it is worth the extra effort or confusion of maintaining two sets of books. As a last resort, Joan has prepared income statements under five different scenarios of production volume. She believes that if this doesnt convince Jeff that their current income statements have been misleading, nothing will. The following table shows the inventory unit data under five scenarios. Each scenario should be considered independently.
Scenario | |||||||||||||||
A | B | C | D | E | |||||||||||
Beginning inventory | 250 | 250 | 250 | 250 | 250 | ||||||||||
Production | 580 | 705 | 830 | 955 | 1,080 | ||||||||||
Sales | (830) | (830) | (830) | (830) | (830) | ||||||||||
Ending inventory | 0 | 125 | 250 | 375 | 500 |
Joan gathered the following information from the accounting records. Fixed manufacturing costs per unit were determined based on normal production of 830 units per year. The 250 units in beginning inventory are valued at $62.90.
Sales price per unit | $ | 98.20 | |
Variable manufacturing costs per unit | $ | 20.00 | |
Fixed manufacturing costs per unit | $ | 42.90 | |
Total fixed manufacturing costs | $ | 35,607 | |
Total selling expense (all fixed) | $ | 28,410 |
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