Stanley Corporation produces a single product. The following is a cost structure
ID: 2344559 • Letter: S
Question
Stanley Corporation produces a single product. The following is a cost structure applied to its first year of operations.Sales price $15 per unit
Variable costs:
Selling, general & admin $2 per unit
Production $4 per unit
Fixed costs (total incurred for the year):
Selling, general & admin $14,000
Production $20,000
During the first year, the company manufactured 5,000 units and sold 3,800 units.
a. How much income before income taxes would be reported if Stanley uses absorption costing? Please show your income statement in proper form.
b. How much income before income taxes would be reported if variable costing was used? Please show your income statement in proper form.
c. Show why the two costing methods give different income amounts. (Show your answer in units and dollar amounts.)
Explanation / Answer
a.
sales
57000
(3800*15)
less cogs
30400
(3800*4 + 20,000*(3800/5000)
gross profit
26600
less selling, gen…
21600
(3800*2 + 14000)
net income
5000
answer: $5000
b.
sales
57000
(3800*15)
less variable costs
22800
(3800*6)
contribution margin
34200
less fixed costs
34000
net income
200
Answer: $200
c. Difference is because of fixed product costs that are expensed under variable but not absorption.
Fixed production costs = 20,000
number of units = 5,000
fixed productuib cost per unit = $4 per unit
1200 units were not sold: 1200 units*$4 = $4800
This is the difference between the two: 1200 units at $4 per unit = $4800.
a.
sales
57000
(3800*15)
less cogs
30400
(3800*4 + 20,000*(3800/5000)
gross profit
26600
less selling, gen…
21600
(3800*2 + 14000)
net income
5000
answer: $5000
b.
sales
57000
(3800*15)
less variable costs
22800
(3800*6)
contribution margin
34200
less fixed costs
34000
net income
200
Answer: $200
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