Expected sales for next year for the Huxtable Division is 150,000 units. Bill Co

Question

Expected sales for next year for the Huxtable Division is 150,000 units. Bill Cosby, manager of the Huxtable Division, is under pressure to improve the performance of the Division. As he plans for next year, he has to decide whether to produce 150,000 units or 180,000 units. The Huxtable Division will have higher net income if Bill Cosby decides to produce
Answer

A. 180,000 units if income is measured under absorption costing.
B. 150,000 units if income is measured under variable costing.
C. 180,000 units if income is measured under variable costing.
D. 150,000 units if income is measured under absorption costing.

Explanation / Answer

Answer is b) In general absorption costing will be larger than variable costing because it will include Direct materials, direct labor and all overheads (fixed + variable), whereas variable costing will only include the variable components. If he produces 180,000, this is 30,000 units more than expected sales, and might not be sold.

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