The JOJO Company manufactures a single product, the ski board. The budgeted selling price is $30 per unit. The annual budgeted fixed manufacturing overhead is $3,600,000. Snow Lover has zero inventory at the beginning of 2020.

Information about Snow Lovers budgeted sales and production volume for year 2020 is:

Sales volume 250,000 units

Production volume 300,000 units

The selling and administrative cost is a mixed cost. During years with heavy snow, when Snow Lover sells 500,000 units of ski boards, the selling and administrative cost is $1,300,000. During years with little snow when Snow Lover sells 100,000 units, the selling and administrative cost is $500,000.

Required

a) Use the high-low method to estimate the cost function for selling and administrative costs. (4 marks)

2. Calculate the difference in profit between absorption and variable costing method for year 2020. Which stock-costing method has the higher profit? (6 marks)

3. If the managers compensation is directly linked to Snow Lovers profit, the management accountant suggests that manager to increase the production volume. Explain why the management accountant makes this suggestion. What could the firm do to mitigate the concern of overproduction? (6 marks)