Question 3 (20 marks)

Hermione Ltd. produces magical wands. The budgeted production equals 500 magical wands and the budgeted fixed production overheads equals 282,000. The actual production level was 20% lower than estimated and the actual fixed production overheads equal 300,000. The selling, general and administrative expenses equal 18,250. Hermione Ltd. sells 200 magical wands for a price of 150 per unit. The variable production cost per unit is 56.

Required:

a) Generate the profit statement using the absorption costing technique.

b) Considering your answer in a), which is your advice for Hermione Ltd.? Explain your answer in detail.

(10 marks)

c) Would your answers in a) and b) change if the amount of magical wands sold equals 400 units?