Question no 2

Silgan Containers Company manufactures metal cans used in the food-processing industry. A case of cans sells for $25. The variable costs of production for one case of cans are as follows:

Direct Material $ 7.50

Direct labor $ 2.50

Variable manufacturing overhead$ 6.00

Total variable manufacturing cost per case $ 16.00

Variable selling and administrative costs amount to $ 0.50 per case. Budgeted fixed manufacturing overhead is $ 400,000 per year, and fixed selling and administrative cost is $ 37,500 per year. The following data pertain to the company's first three years of operation. (A unit refers to one case of cans.)

Year 1 Year 2 Year 3

Planned production (in units) 80,000 80,000 80,000

Finished-goods inventory (in units), January 1 0 0 20,000

Actual production (in units)80,000 80,000 80,000

Sales (in units) 80,000 60,000 90,000

Finished-goods inventory (in units), December 310 20,000 10,000

Actual costs were the same as the budgeted costs.

Required:

1.Prepare operating income statements for Silgan ContainersCompany for its first three yearsof operations using:

a.Absorption costing.

b.Variable costing.

2.Reconcile Silgan Containers Company's operating income reported under absorption and variable costing for each of its first three years of operation. Use the shortcut method.

3.Suppose that during Silgan's fourth year of operation actual production equals planned production, actual costs are equal to budgeted costs, and the company ends the year with no inventory on hand.

a.What will be the difference between absorption-costing operating income and variable-costing operating income in year 4?

b.What will be the relationship between total operating income for the four-year period as reported under absorption and variable costing? Explain