Under variable costing, the cost of goods manufactured includes only variable manufacturing costs. This type of income statement includes a calculation of manufacturing margin.

Saxon, Inc.

Variable Costing Income Statement

For the Year Ended December 31, 2016

1	Sales		$1,275,000.00
2	Variable cost of goods sold:
3	Beginning inventory	$0.00
4	Variable cost of goods manufactured	560,000.00
5	Less ending inventory	84,000.00	476,000.00
6	Manufacturing margin		$799,000.00
7	Variable selling and administrative expenses		221,000.00
8	Contribution margin		$578,000.00
9	Fixed costs:
10	Fixed manufacturing costs	$240,000.00
11	Fixed selling and administrative expenses	65,000.00	305,000.00
12	Income from operations		$273,000.00

Absorption costing does not distinguish between variable and fixed costs. All manufacturing costs are included in the cost of goods sold.

Saxon, Inc.

Absorption Costing Income Statement

For the Year Ended December 31, 2016

1	Sales		$1,275,000.00
2	Cost of goods sold:
3	Beginning inventory	$0.00
4	Cost of goods manufactured	800,000.00
5	Less ending inventory	120,000.00	680,000.00
6	Gross profit		$595,000.00
7	Selling and administrative expenses		286,000.00
8	Income from operations		$309,000.00

The production manager for Saxon, Inc. is worried because the company is not showing a high enough profit. Looking at the income statements on the Absorption Statement panel and the Variable Statement panel, he notices that the net income is higher on the absorption cost income statement. He is considering manufacturing another 10,000 units, up to the companys capacity for manufacturing, in the coming year. He reasons that this will boost net income and satisfy the companys owner that the company is sufficiently profitable. Although the total units manufactured changes, assume that total fixed costs, unit variable costs, unit sales price, and the sales levels are the same. Complete questions (1) - (4) below.

1. Use the income statements on the Absorption Statement and Variable Statement panels to complete the following table for the original production level. Then prepare similar income statements at a production level 10,000 units higher and add that information to the table. Assume that total fixed costs, unit variable costs, unit sales price, and the sales levels are the same at both production levels.

Original Production Level-Absorption
Original Production Level-Variable
Additional 1000 Units-Absorption
Additional 1000 Units-Variable

3. What is the change in net income from producing 10,000 additional units under variable costing?2. What is the change in net income from producing 10,000 additional units under absorption costing?

After reviewing the data on the Contribution Margin Data panel, complete the contribution margin analysis below. For those boxes in which you must enter subtracted or negative numbers use a minus sign.

Question not attempted.

Score: 0/44

Saxon, Inc.

Contribution Margin Analysis

1	Planned contribution margin
2	Effect of changes in sales:
3	Sales quantity factor
4	Unit price factor
5	Total effect of changes in sales
6	Effect of changes in variable cost of goods sold:
7	Variable cost quantity factor
8	Unit cost factor
9	Total effect of changes in variable cost of goods sold
10	Effect of changes in selling and administrative expenses:
11	Variable cost quantity factor
12	Unit cost factor
13	Total effect of changes in selling and administrative expenses
14	Actual contribution margin