Basic Electric Motors is a division of Basic Electric Products Corporation. The division manufactures and sells an electric switch used in a wide variety of applications. During the coming year, it expects to sell 200,000 units for $8 per unit. Ester Madden is the division manager. She is considering producing either 200,000 or 250,000 units during the period. Other information is as follows:
Division Information for 2012
Beginning inventory ............................................................. 0
Expected sales in units .................................................. 200,000
Selling price per unit ........................................................... $8
Variable manufacturing cost per unit ........................................ $3
Fixed manufacturing cost (total) .................................... $500,000
Fixed manufacturing overhead costs per unit
Based on 200,000 units $2.50 per unit ............... ($500,000 ( 200,000)
Based on 250,000 units $2.00 per unit ............... ($500,000 ( 250,000)
Manufacturing cost per unit
Based on 200,000 units .......... $5.50 per unit ($3 variable + $2.50 fixed)
Based on 250,000 units .............. $5.00 per unit ($3 variable + $2 fixed)
Variable selling and administrative expenses .................. $0.50 per unit
Fixed selling and administrative expenses (total) .................... $12,000
Instructions
(a) Prepare an absorption-costing income statement, with one column showing the results if 200,000 units are produced and one column showing the results if 250,000 units are produced.
(b) Prepare a variable-costing income statement, with one column showing the results if 200,000 units are produced and one column showing the results if 250,000 units are produced.
(c) Reconcile the difference in the net incomes under the two approaches and explain what causes this difference.
(d) Discuss the usefulness of the variable-costing income statements versus the absorption-costing income statements for decision-making and for evaluating the manager's performance?