Question
The Grand Rapid Corporation has two identical divisions: Western and Northern. Their sales, production volume, and fixed manufacturing costs have been the same for both
The Grand Rapid Corporation has two identical divisions: Western and Northern. Their sales, production volume, and fixed manufacturing costs have been the same for both divisions for the last five years and are as follows:
Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
Units Produced | 50000 | 50000 | 50000 | 50000 | 50000 |
Units Sold | 40000 | 45000 | 55000 | 50000 | 55000 |
Fixed MFG Costs | 250000 | 250000 | 250000 | 250000 | 250000 |
Western uses absorption costing and Northern uses variable costing. Both use FIFO inventory methods. Variable manufacturing costs are $5 per unit. Both have identical selling prices and selling and administrative expenses. There were no Year 1 beginning inventories.
Determine the difference in profits for each division for Years 1 through 5. Explain why profits differ between the two divisions.
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