Renton Tractor Company was formed at the start of 2009 and produces a small garden tractor. The selling price is $6,000, variable production costs are $2,500 per unit, fixed production costs are $8,000,000 per year, and fixed selling and administrative costs are $4,500,000 per year. Data below indicate net income for 2009—2011 under full costing.
In 2009 and 2010, Edward Vendon was the president of Renton Tractor. The board of directors was generally pleased with the company’s performance under his leadership—the company hit the break-even point in its first year of operation and had a modest profit in 2010. Edward quit at the end of 2010 and went on to start an e-commerce company selling used cars on the Internet. His replacement, Zac Dalton, was apparently not as successful as Ed.Zac argued that he was improving the company by getting rid of excess inventory, but the board noted that the company showed a $2,950,000 loss in the first year of his leadership.

a. Recalculate net income for all three years using variable costing.
b. Based on the limited information available, comment on the relative job performance of Ed and Zac.
c. Note that under kill costing, the company is showing a substantial loss in 2011. Based on the limited information available, does it appear that the company should get out of the tractorbusiness?

  • CreatedSeptember 18, 2013
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