Problem 22-6A Jackson Company produces plastic that is used for injection-moldin
ID: 2605331 • Letter: P
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
1. Computation of Income statement for 2016 and 2017 by using variable costing method:
2016
2017
Sales
3,500*$2,000 = $ 7,000,000
4,000*$2,000 = $ 8,000,000
Variable expenses
Variable cost of goods sold
Inventory, January 1
-
150,000
Variable manufacturing costs
4,000*(2,000*15%)= 1,200,000
3,500*(2,000*15%)= 1,050,000
Cost of goods available for sale
1,200,000
1,200,000
Inventory, December 31
500*(2,000*15%)= 150,000
-
Variable cost of goods sold
1,050,000
1,200,000
Variable selling expenses (sales*10%)
700,000
800,000
Total variable expenses
1,750,000
2,000,000
Contribution margin
5,250,000
6,000,000
Fixed expenses
Manufacturing overhead
2,800,000
2,800,000
Administrative
500,000
500,000
Total fixed expenses
3,300,000
3,300,000
Income from operations
$ 1,950,000
$ 2,700,000
2. Computation of Income statement for 2016 and 2017 by using absorption costing method:
2016
2017
Sales
$ 7,000,000
$ 8,000,000
Cost of goods sold
Inventory, January 1
-
500,000
Cost of goods manufactured
4,000*{(2,000*0.15)+(2,800,000/4,000)} = 4,000,000
3,500*{(2,000*0.15)+(2,800,000/3,500)} = 3,850,000
Cost of goods available for sale
4,000,000
4,350,000
Inventory, December 31
500*{(2,000*0.15)+(2,800,000/4,000)}= 500,000
-
Cost of goods sold
3,500,000
4,350,000
Gross profit
3,500,000
3,650,000
Operating expenses
Selling expenses
700,000
800,000
Administrative expenses
500,000
500,000
Total operating expenses
1,200,000
1,300,000
Income from operations
$ 2,300,000
$ 2,350,000
3. Reconciliation:
2016
2017
Variable costing income
$ 1,950,000
$ 2,700,000
Fixed manufacturing overhead expensed with variable costing
2,800,000
2,800,000
Less: Fixed manufacturing overhead expensed with absorption costing
2,800,000*3,500/4,000 = (2,450,000)
(3,150,000)
Difference
350,000
(350,000)
Absorption costing income
$ 2,300,000
$ 2,350,000
2016
2017
Sales
3,500*$2,000 = $ 7,000,000
4,000*$2,000 = $ 8,000,000
Variable expenses
Variable cost of goods sold
Inventory, January 1
-
150,000
Variable manufacturing costs
4,000*(2,000*15%)= 1,200,000
3,500*(2,000*15%)= 1,050,000
Cost of goods available for sale
1,200,000
1,200,000
Inventory, December 31
500*(2,000*15%)= 150,000
-
Variable cost of goods sold
1,050,000
1,200,000
Variable selling expenses (sales*10%)
700,000
800,000
Total variable expenses
1,750,000
2,000,000
Contribution margin
5,250,000
6,000,000
Fixed expenses
Manufacturing overhead
2,800,000
2,800,000
Administrative
500,000
500,000
Total fixed expenses
3,300,000
3,300,000
Income from operations
$ 1,950,000
$ 2,700,000
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