Answer:
<u>1. Income statement based on the absorption costing concept.*
</u>
Sales $10,800,000.00
Less Cost of Goods Sold
Beginning Inventory $0
Add Cost of Goods Manufactured $9,600,000.00
Less Ending Inventory ($960,000.00) ($8,640,000.00)
Gross Profit $2,160,000.00
Less Expenses :
Selling and administrative expenses:
Variable $1,080,000.00
Fixed $180,000.00 ($1,260,000.00)
Net Income/(loss) $900,000.00
<u>2. Income statement based on the variable costing concept.*</u>
Sales $10,800,000.00
Less Cost of Goods Sold
Beginning Inventory $0
Add Cost of Goods Manufactured 9,280,000.00
Less Ending Inventory ($928,000.00) ($8,352,000.00)
Contribution $2,448,000.00
Less Expenses :
Fixed manufacturing cost $320,000.00
Selling and administrative expenses:
Variable $1,080,000.00
Fixed $180,000.00 ($1,580,000.00)
Net Income/(loss) $868,000.00
3. Reason
Fixed Costs that are deferred in Ending Inventory units under adsorption costing has resulted in absorption costing having a larger profit.
Explanation:
Production units 80,000
Less units Sold (72,000)
Ending Inventory units 8,000
absorption costing calculations
<u>Manufacturing Cost - absorption costing</u>
$
Direct materials 6,400,000.00
Direct labor 1,600,000.00
Variable manufacturing cost 1,280,000.00
Fixed manufacturing cost 320,000.00
Total Manufacturing Cost 9,600,000.00
Ending Inventory = 9,600,000.00 × 8,000/ 80,000
= $960,000
variable costing calculations
<u>Manufacturing Cost - variable costing</u>
$
Direct materials 6,400,000.00
Direct labor 1,600,000.00
Variable manufacturing cost 1,280,000.00
Total Manufacturing Cost 9,280,000.00
Ending Inventory = 9,280,000.00 × 8,000/ 80,000
= $928,000
