Starfax, Inc., manufactures a small part that is widely used in various electron
ID: 2341865 • Letter: S
Question
Starfax, Inc., manufactures a small part that is widely used in various electronic products such as home computers. Operating results for the first three years of activity were as follows (absorption costing basis):
In the latter part of Year 2, a competitor went out of business and in the process dumped a large number of units on the market. As a result, Starfax’s Sales dropped by 20% during Year 2 even though production increased during the year. Management had expected sales to remain constant at 50,000 units; the increased production was designed to provide the company with a buffer of protection against unexpected spurts in demand. By the start of Year 3, management could see that inventory was excessive and that spurts in demand were unlikely. To reduce the excessive inventories, Starfax cut back production during Year 3, as shown below:
Additional information about the company follows:
The company’s plant is highly automated. Variable manufacturing expenses (direct materials, direct labor, and variable manufacturing overhead) total only $5.00 per unit, and fixed manufacturing overhead expenses total $600,000 per year.
Fixed manufacturing overhead costs are applied to units of product on the basis of each year’s production. That is, a new fixed manufacturing overhead rate is computed each year.
Variable selling and administrative expenses were $2 per unit sold in each year. Fixed selling and administrative expenses totaled $60,000 per year.
The company uses a FIFO inventory flow assumption.
Starfax’s management can’t understand why profits more than doubled during Year 2 when sales dropped by 20%, and why a loss was incurred during Year 3 when sales recovered to previous levels.
Required:
1. Prepare a contribution format variable costing income statement for each year.
Year 1 Year 2 Year 3 Sales $ 1,050,000 $ 840,000 $ 1,050,000 Cost of goods sold 850,000 600,000 900,000 Gross margin 200,000 240,000 150,000 Selling and administrative expenses 160,000 140,000 160,000 Net operating income (loss) $ 40,000 $ 100,000 $ (10,000) Required 1. Prepare a contribution format variable costing income statement for each year. Starfax, Variable Costing Income Statement Year 1 Year 3 Unit sales Sales Variable expenses 50,000 40,000 50,000 1,050,000 840,000 1,050,000 250,0000 200,000. 250,000 100,000. 80,0000 100,000 > Variable cost of goods sold Variable selling and administrative Total variable expenses Contribution margin Fixed expenses: 350,000 280,000 350,000 700,000 560,000 700,000 600,000600,000600,000 Fixed manufacturing overhead Fixed selling and administrative 60,000 60,000 60,0000 Total fixed expenses 660,000 660,000 660,000 Net operating income (loss) 40,000 40,000 100,000Explanation / Answer
Starfex Inc.
Variable costing income statement
Year 1
Year 2
Year 3
Unit sales
50000
40000
50000
Sales
1050000
840000
1050000
Less: variable expenses
Variable cost of goods sold (unit sales * 5)
250000
200000
250000
Variable selling and administration (unit sales * 2)
100000
80000
100000
Total variable expenses
350000
280000
350000
Contribution margin
700000
560000
700000
Less: fixed cost
Fixed manufacture overhead
600000
600000
600000
Fixed selling and administration expense
60000
60000
60000
Total fixed costs
660000
660000
660000
Net operating income (loss)
40000
-100000
40000
Year 1
Year 2
Year 3
Beginning inventory
0
0
20000
Add: production in units
50000
60000
40000
Less: sales in units
50000
40000
50000
Ending inventory
0
20000
10000
Fixed manufacturing overhead
600000
600000
600000
Unit produced
50000
60000
40000
Fixed manufacturing overhead per unit (fixed manufacturing overhead / unit produced )
$ 12.00
$ 10.00
$ 15.00
Fixed manufacturing overhead per unit
12
10
15
Variable cost per unit
5
5
5
Unit product cost under absorption costing
$ 17.00
$ 15.00
$ 20.00
Ending inventory
0
20000
10000
Per unit inventory valued In absorption costing
17
15
20
Ending inventory balance as per absorption cost ( ending inventory * per unit inventory valued In absorption costing )
0
300000
200000
Ending inventory balance as per marginal cost (ending inventory * $ 5 per unit)
0
100000
50000
Difference in ending inventory
200000
150000
Difference in ending inventory
0
200000
150000
Less: difference in beginning inventory (year 2 ending inventory difference become difference in beginning inventory year 3
-200000
Difference in inventory valuation between absorption costing and marginal costing
200000
-50000
Reconciliation of net operating income
Variable cost net operating income
40000
-100000
40000
Fixed manufactured overhead differed in year 2
200000
Less: fixed manufacture overhead cost in year 3 and realized in future under absorption costing
-50000
Absorption costing net operating income (loss)
40000
100000
-10000
Starfex Inc.
Variable costing income statement
Year 1
Year 2
Year 3
Unit sales
50000
40000
50000
Sales
1050000
840000
1050000
Less: variable expenses
Variable cost of goods sold (unit sales * 5)
250000
200000
250000
Variable selling and administration (unit sales * 2)
100000
80000
100000
Total variable expenses
350000
280000
350000
Contribution margin
700000
560000
700000
Less: fixed cost
Fixed manufacture overhead
600000
600000
600000
Fixed selling and administration expense
60000
60000
60000
Total fixed costs
660000
660000
660000
Net operating income (loss)
40000
-100000
40000
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