Answer:
Horace Company
1. 2020 Income Statement using variable costing
Sales revenue $7,992,000
Variable Cost of goods sold:
Manufacturing costs $2,183,000
Marketing cost per unit sold $851,000
Contribution margin $4,958,000
Fixed Costs:
Manufacturing costs $1,550,000
Administrative costs $906,000
Marketing costs $1,479,000
Total fixed costs = $3,935,000
Net income = $1,023,000
2. 2020 Income Statement using absorption costing:
2. Sales revenue $7,992,000
Cost of goods sold:
Variable Manufacturing costs $2,478,000 ($118 * 21,000)
Fixed Manufacturing costs 1,550,000
Total cost of production $4,028,000
Less Ending Inventory 479,525
Cost of goods sold $3,548,475
Gross profit $4,443,525
Period costs:
Variable marketing costs $851,000
Fixed marketing costs 1,479,000
Administrative costs 906,000
Total period costs $3,236,000
Net income $1,207,525
3. The differences that Horace obtains in the operating incomes under variable costing and absorption costing are due to the fixed manufacturing costs that are included in the ending inventory under absorption costing, making the cost of goods sold to be less and resulting in more profits. Under variable costing, the ending inventory does not include the fixed manufacturing costs. So the cost of goods sold is higher, resulting in reduced profits.
4. A bonus for Horace's supervisors based on gross margin under absorption costing will entice supervisors to produce more and sell less products so that the fixed costs can be carried forward. Many products will be left in inventory at the end of the period, which is then carried forward to the following period, thus, enhancing the period's gross profit for maximum bonus for the supervisors.
Modifications that Horace management could make to improve the bonus plan is ensuring that production units do not exceed the budgeted sales units by a large margin and ensuring that ending inventory does not exceed an established limit. This will entice the supervisors to produce according to market demand.
Explanation:
a) Data and Calculations:
Budgeted production and sales units for 2020 = 25,000
Actual production units for 2020 = 21,000
Actual sales unit for 2020 = 18,500
Ending inventory units for 2020 = 2,500
Selling price per unit = $432
Sales revenue = $7,992,000 ($432 * 18,500)
Variable cost:
Manufacturing cost per unit produced:
Direct materials $33
Direct manufacturing labor $23
Manufacturing Overhead $62 $118
Marketing cost per unit sold $46
Total variable costs per unit $164
Fixed cost:
Manufacturing costs $1,550,000
Administrative costs $906,000
Marketing costs $1,479,000
Total fixed costs = $3,935,000
1. 2020 Income Statement using variable costing
Sales revenue $7,992,000 ($432 * 18,500)
Variable Cost of goods sold:
Manufacturing costs $2,183,000 ($118 * 18,500)
Marketing cost per unit sold $851,000 ($46 * 18,500)
Contribution margin $4,958,000 ($268 * 18,500)
Fixed Costs:
Manufacturing costs $1,550,000
Administrative costs $906,000
Marketing costs $1,479,000
Total fixed costs = $3,935,000
Net income = $1,023,000
2. Sales revenue $7,992,000
Cost of goods sold:
Variable Manufacturing costs $2,478,000 ($118 * 21,000)
Fixed Manufacturing costs 1,550,000
Total cost of production $4,028,000 (per unit = $191.81)
Less Ending Inventory 479,525 ($191.81 * 2,500)
Cost of goods sold $3,548,475
Gross profit $4,443,525
Period costs:
Variable marketing costs $851,000
Fixed marketing costs 1,479,000
Administrative costs 906,000
Total period costs $3,236,000
Net income $1,207,525