Answer:
Part a.
Income statement based on the absorption costing concept.
Sales $8,800,000.00
Less Cost of Sales
Beginning Inventory $0
Add Manufacturing Cost $6,048,000.00
Less Ending Inventory ($504,000.00) ($5,544,000.00)
Gross Profit $3,256,000.00
Less Expenses :
Selling and administrative expenses:
Variable $528,000.00
Fixed $352,000.00 ($880,000.00)
Net Income/(loss) $2,376,000.00
Part b.
Income statement based on the variable costing concept.
Sales $8,800,000.00
Less Cost of Sales
Beginning Inventory $0
Add Manufacturing Cost $5,520,000.00
Less Ending Inventory ($460,000.00) ($5,060,000.00)
Contribution $3,740,000.00
Less Expenses :
Fixed manufacturing cost $528,000.00
Selling and administrative expenses:
Variable $528,000.00
Fixed $352,000.00 ($1,408,000.00)
Net Income/(loss) $2,332,000.00
Part c.
Reason : Fixed Costs deferred in Ending Inventory in Absorption Costing has resulted in a higher Income.
Explanation:
<u>Units in Ending Inventory Calculation :</u>
Production 48,000
Less Sales (44,000)
Ending Inventory 4,000
Absorption Costing Calcs
<u>Variable Manufacturing Costs</u>
Direct materials $3,360,000.00
Direct labor $1,344,000.00
Variable manufacturing cost $816,000.00
Fixed manufacturing cost $528,000.00
Total $6,048,000.00
Ending Inventory = $6,048,000.00 × 4,000 / 48,000
= $504,000
Variable Costing Calcs
<u>Variable Manufacturing Costs</u>
Direct materials $3,360,000.00
Direct labor $1,344,000.00
Variable manufacturing cost $816,000.00
Total $5,520,000.00
Ending Inventory = $5,520,000.00 × 4,000 / 48,000
= $460,000
