Famous Desk Company manufactures desks for office use. The variable cost of 100 units in beginning inventory is $80 each. The absorption cost is $146.67 each. Assume the LIFO cost flow assumption. Following is information about this period’s production.
Selling price .............. $300 per desk
Variable production cost ........ $80 per desk
Fixed production costs .......... $10,000 per month
Variable selling and administrative .... $30 per desk
Fixed selling and administrative ...... $6,000 per month
A. Estimate operating income for a month in which 200 desks are manufactured and 220 are sold if the company uses variable costing.
B. Estimate operating income for a month in which 200 desks are manufactured and 220 are sold if the company uses absorption costing and allocates fixed production costs to inventory using a rate based on normal capacity of 150 desks per month. Assume that production volume for the entire year is expected to return to normal levels.