Whenever the units manufactured differ from the units sold, finished goods inventory is affected. In analyzing income from operations, such increases and decreases could be misinterpreted as operating efficiencies or inefficiencies. Each decision-making situation should be carefully analyzed in deciding whether absorption or variable costing reporting would be more useful.

All costs are controllable in the long run by someone within a business. For a given level of management, costs may be controllable costs or non-controllable costs.

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 income from operations is higher on the absorption cost income statement. He is considering manufacturing another 10,000 units, up to the company’s capacity for manufacturing, in the coming year. He reasons that this will boost income from operations and satisfy the company’s 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) that follow. If the answer is zero, enter "0".

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.

Income From Operations
Original	Original	Additional	Additional
Production	Production	10,000	10,000
Level-Absorption	Level-Variable	Units-Absorption	Units-Variable
325000	265000

Following the examples on the Absorption Statement and Variable Statement panels, recompute income from operations under the absorption and variable cost methods, given that the additional units are manufactured. Don’t forget that fixed costs will remain the same at any production level within the relevant range.

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

Review your chart and determine the change in income from operations, focusing only on the change in absorption costing amounts.

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

References:

Saxon, Inc.

Absorption Costing Income Statement

For the Year Ended December 31

1	Sales		$1,200,000.00
2	Cost of goods sold:
3	Beginning inventory	$0.00
4	Cost of goods manufactured	800,000.00
5	Ending inventory	(200,000.00)
6	The total cost of goods sold		600,000.00
7	Gross profit		$600,000.00
8	Selling and administrative expenses		275,000.00
9	Income from operations		$325,000.00

Saxon, Inc.

Variable Costing Income Statement

For the Year Ended December 31

1	Sales		$1,200,000.00
2	The variable cost of goods sold:
3	Beginning inventory	$0.00
4	The variable cost of goods manufactured	560,000.00
5	Ending inventory	(140,000.00)
6	The total variable cost of goods sold		420,000.00
7	Manufacturing margin		$780,000.00
8	Variable selling and administrative expenses		210,000.00
9	Contribution margin		$570,000.00
10	Fixed costs:
11	Fixed manufacturing costs	$240,000.00
12	Fixed selling and administrative expenses	65,000.00
13	Total fixed costs		305,000.00
14	Income from operations		$265,000.00

Review the income statements on the Absorption Statement and Variable Statement panels, then complete the following table. The company’s sales price per unit is $80.00, and the number of units in ending inventory is 5,000.

Number of units sold 15,000

Variable sales and administrative cost per unit $0.14

Number of units manufactured 20,000

The variable cost of goods manufactured per unit is $28.00

Fixed manufacturing cost per unit $12.00