Pitt Corporation began operations in 2016 to manufacture a single product. Relevant data for the year follow. There are no work in process inventories.
OPERATING DATA FOR 2016
Quantities:
Beginning inventories, finished goods .....................................-0-
Units produced during the year ..........................................5,000
Units sold during the year ..................................................4,800
Costs:
Direct materials ($26 per unit) ...................................... $130,000
Direct labor ($24 per unit) ..............................................120,000
Variable factory overhead ($10 per unit) .............................50,000
Fixed factory overhead ..................................................125,000
Variable selling and administrative expenses ($7 per unit) ........33,600
Fixed selling and administrative expenses ...........................75,000
Selling price for each unit ..................................................125
INSTRUCTIONS
1. Prepare an income statement for 2016 using direct costing.
2. Assume that the company has an opportunity to sell 1,000 units of the product in a foreign country for $79 per unit. No fixed or variable selling and administrative expenses would be incurred in connection with these units except a $7 shipping and handling cost per unit. The company has idle capacity, and the order would not affect present markets. Would it be profitable for the company to accept the order? Show all computations.
Analyze: If Pitt Corporation had used the absorption costing method, would the value of ending inventories be higher or lower than that reflected in the statement you prepared? Explain.