Question

Succulent Juice Company manufactures and sells premium tomato juice by the gallon. Succulent just finished its first year of operations. The following data relates to this first year of operations.Number of Gallons Produced 80,000Number of Gallons Sold 70,000Sales Price $3.00/gallonUnit Product Cost (variable costing) $1.45/gallonContribution Margin $84,000Total Fixed Manufacturing Overhead $?Total Fixed Selling & Administrative $25,000Variable Selling & Administrative $?Inventory value under absorption costing $29,500Required:1. Prepare an Income statement for Succulent using the Absorption Costing Method. (Hints: How many units were in inventory? What was the cost per unit? Why is the CM only $84,000?)2. Explain in one or two sentences, the key differences between the net income under Absorption and the net income under Variable costing. Determine the variable costing net income. Prepare a variable costing income statement.

Answer 1

Answer:

Instructions are below.

Explanation:

Giving the following information:

Number of Gallons Produced 80,000

Number of Gallons Sold 70,000

Sales Price $3.00/gallon

Unit Product Cost (variable costing) $1.45/gallon

Contribution Margin $84,000

Total Fixed Manufacturing Overhead $?

Total Fixed Selling & Administrative $25,000

Variable Selling & Administrative $?Total Fixed Selling & Administrative $25,000

Variable Selling & Administrative $?

Inventory value under absorption costing $29,500

The difference between the absorption and variable costing method is that the first one includes the fixed manufacturing overhead in the product cost.

Absorption= direct material + direct labor + total unitary overhead

Variable=  direct material + direct labor + unitary variable overhead

First, we will calculate all the missing information:

Sales= 3*70,000= 210,000

Total variable cost= 210,000 - 84,000= 126,000

Unitary varaible cost= 126,000/70,000= $1.8 per unit

Unitary variable selling and administrative= 1.8 - 1.45= 0.35

Unitary inventory production cost (absorption)= 29,500/10,000= $2.95

Unitary fixed manufacturing cost= 2.95 - 1.45= 1.5

Now, we can determine the income statement under absorption and variable costing method:

Absorption costing:

Sales= 210,000

COGS= 70,000*2.95= (206,500)

Gross profit= 3,500

Total Fixed Selling & Administrative= (25,000)

Variable Selling & Administrative= (0.35*70,000)=

Net operating income= (46,000)

Variable costing method:

Sales= 210,000

Total variable cost= (126,000)

Contribution margin= 84,000

Total Fixed Selling & Administrative= (25,000)

Total fixed manufacturing overhead= (80,000*1.5)= (120,000)

Net operating income= (61,000)