Problem 22-6A Jackson Company produces plastic that is used for injection-moldin

Question

Problem 22-6A

Jackson Company produces plastic that is used for injection-molding applications such as gears for small motors. In 2016, the first year of operations, Jackson produced 4,000 tons of plastic and sold 3,500 tons. In 2017, the production and sales results were exactly reversed. In each year, the selling price per ton was $2,000, variable manufacturing costs were 15% of the sales price of units produced, variable selling expenses were 10% of the selling price of units sold, fixed manufacturing costs were $2,800,000, and fixed administrative expenses were $500,000.

Problem 22-6A

Jackson Company produces plastic that is used for injection-molding applications such as gears for small motors. In 2016, the first year of operations, Jackson produced 4,000 tons of plastic and sold 3,500 tons. In 2017, the production and sales results were exactly reversed. In each year, the selling price per ton was $2,000, variable manufacturing costs were 15% of the sales price of units produced, variable selling expenses were 10% of the selling price of units sold, fixed manufacturing costs were $2,800,000, and fixed administrative expenses were $500,000.

Explanation / Answer

Variable Costing Income statement: year 2016 2017 Sales (3500 & 4000 @ $2000) 7000000 8000000 Less VC manuf 1050000 1200000 selling 700000 800000 Total VC 1750000 2000000 Contribution 5250000 6000000 Less: FC: manuf 2800000 2800000 adminis 500000 500000 Total FC 3300000 3300000 NOI 1950000 2700000 Absorption costing Income Statement: year 2016 2017 Sales 7000000 8000000 Less Manuf Cost: Variable 1050000 1200000 Fixed (CS -/+) 2450000 3150000 (2.8m*3500/4000) Total Manuf Cost 3500000 4350000 Gross Profit 3500000 3650000 Less: selling & admin exp: selling 700000 800000 adminis 500000 500000 Total selling and adminis exp. 1200000 1300000 NOI 2300000 2350000 Reconcile the differences each year in net income under the two costing approaches. Variable costing F.Manuf cost 2800000 2800000 Less: Absorption F. Manuf cost 2450000 3150000 Difference 350000 -350000 +NOI as per Variable costing 1950000 2700000 NOI as per Absorption costing 2300000 2350000

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