K Class Activity 5 This information is a repeat of activity 4, except 400 more units (2000 instead of 1600) are produced this time. Y Ltd makes gadgets. It has no opening inventory Closing inventory was 600 units Budgeted and actual fixed manufacturing costs are $800 Budgeted and actual production is 2000 units Variable manufacturing cost was $1.50 per unit The selling price was $5 per unit Sales commissions of 5% of sales revenue are paid to sales people Other non-manufacturing fixed costs total $300 Calculate the Operating Income according to both Absorption and Variable costing and explain the difference KAPLAN Class Activity 6 Now compare the results of activities 4 & 5 - remember the only difference was that production was 1,600 in activity 4 but 2,000 in activity 5. How can just increasing production (but not sales) result in higher profits under absorption costing? Abs. Costing I/S Production = 1,600 units Var. Costing/5 Sales Revenue $5 x 1,000 5,000 Sales Revenue $5 x 1,000 = 5,000 Less VCOGS $1.50 X 1,000- 1,500 Less VCOGS $1.50 X 1,000=- 1,500 Less FCOGS $0.5 X 1,000- 500 Less V Op costs $0.25 X 1,000 250 Gross Margin 3,000 Contribution Margin 3.250 Less V Op costs $0.25 X 1,000 250 Less Fixed Manu Costs 800 Less F Op costs Operating Income 300 Less F Op costs 300 2,450 Operating Income 2,150 Abs. Costing I/S Production = 2,000 units Gross Margin Sales Revenue Less VCOGS Less FCOGS Less V Op costs $5 x 1,000- $1.50 X 1,000- 50.4 X 1,000 5,000 1,500 Sales Revenue Var. Costing 1/5 $5x1,000- 5,000 Less VCOGS $1.50 X 1,000. 1,500 - 400 3,100 Less F Op costs Operating Income $0.25 X 1,000 250 300 2,550 Less V Op costs Contribution Margin Less Fixed Manu Costs Less F Op costs Operating Income 50.25 X 1,000 250 3.250 800 300 2,150 KAPLANELS SCHOOL