Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Starfax, Incorporated, manufactures a small part widely used in various electronic products. Results for the first three years of operations were as follows ( absorption
Starfax, Incorporated, manufactures a small part widely used in various electronic products. Results for the first three years of
operations were as follows absorption costing basis:
In the latter part of Year a competitor went out of business and dumped a large number of units on the market. As a result, Starfax's
sales dropped by during Year even though production increased during the year. Management had expected sales to remain
constant at units; the increased production was designed to provide a buffer of protection against unexpected spurts in
demand. By the start of Year management had excess inventory and realized growth in demand was unlikely; thus, it cut back
production throughout the year, as shown below:
Additional information about the company follows:
a The company's plant is highly automated. Variable manufacturing expenses direct materials, direct labor, and variable
manufacturing overhead total only $ per unit, and fixed manufacturing overhead expenses total $ per year.
b A new fixed manufacturing overhead rate is computed each year based on that year's actual fixed manufacturing overhead costs
divided by the actual number of units produced.
c Variable selling and administrative expenses were $ per unit sold in each year. Fixed selling and administrative expenses totaled
$ per year.
d The company uses a FIFO inventory flow assumption. FIFO means firstin firstout. In other words, it assumes the oldest units in
inventory are sold first.
Starfax's management can't understand why profits doubled during Year when sales dropped by and why a loss was incurred
during Year when sales recovered to previous levels.
Required:
Prepare a variable costing income statement for each year.
Refer to the absorption costing income statements above.
a Compute the unit product cost in each year under absorption costing. Show how much of this cost is variable and how much is
fixed.
b Reconcile the variable costing and absorption costing net operating income figures for each year.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started