Manufacturing Decisions

Whenever the units manufactured differ from the units sold, finished goods inventory is affected. In analyzing operating income, such increases and decreases could be misinterpreted as operating efficiencies or inefficiencies. Each decision$-$making situation should be carefully analyzed in deciding whether absorption or variable costing reporting would be more useful.

All costs are controllable in the long run by someone within a business. For a given level of management, costs may be controllable costs or noncontrollable costs.

The production manager for Saxon, Inc. is worried because the company is not showing a high enough profit. Looking at the income statements on the Absorption Statement and the Variable Statement, he notices that the operating income is higher on the absorption cost income statement. He is considering manufacturing another $10,000$ units, up to the company's capacity for manufacturing, in the coming year. He reasons that this will boost operating income and satisfy the company's owner that the company is sufficiently profitable. Although the total units manufactured changes, assume that total fixed costs, unit variable costs, unit sales price, and the sales levels are the same. Complete questions $(1)-(4)$ that follow. If the answer is zero, enter $"0".$

Use the income statements on the Absorption Statement and Variable Statement to complete the following table for the original production level. Then prepare similar income statements at a production level $10,000$ units higher and add that information to the table. Assume that total fixed costs, unit variable costs, unit sales price, and the sales levels are the same at both production levels.

Operating Income

$\backslash$table$[[\backslash$table$[[$Original Production$],[$Level$-$Absorption$]],\backslash$table$[[$Original Production$],[$Level$-$Variable$]],\backslash$table$[[$Additional $10,000],[$Units$-$Absorption$]],\backslash$table$[[$Additional $10,000],[$Units$-$Variable$]]],[$$$303,000,$$$255,000,$$$603,000,$$$255,000$