BBG Corporation manufactures a synthetic element, pixie dust. Management was surprised to learn that income before taxes had dropped even though the sales volume had increased. Steps had been taken during the year to improve profitability. The steps included raising the selling price by 12% because of a 10% increase in production costs, and instructing the selling and administrative departments to spend no more this year than last year. Both changes were implemented at the beginning of the year.
BBG's accounting department prepared and distributed to top management the comparative income statements and related financial information that follow (BBG uses the FIFO inventory method for finished goods):
BBG CORPORATION
Comparative Statements of Operating Income
(In thousands)

BBG CORPORATION
Selected Operating and Financial Data

Instructions
(a) Explain to management why net income decreased despite the increases in sales price and sales volume.
(b) It has been proposed that the company use variable costing for its internal reporting. Prepare the variable-costing income statement for 2012.
(c) Reconcile the difference in income before taxes using the absorption-costing method currently used by BBG and the variable-costing method proposed for 2012?

2011 $9,000 $7,200 (600) 6,600 2,400 1,500 $ 900 2012 Sales revenue Cost of goods sold Manufacturing volume variance Adjusted cost of goods sold Gross margin Selling and administrative expenses Income before taxes $11,200 S 8,320 495 8,815 2,385 1,500 $ 885 Sales price Material costs Direct labour cost Variable overhead costs Fixed overhead costs Total fixed overhead costs Selling and administrative expenses (all fixed) Sales volume Beginning inventory 2011 10.00/kg $1.50/kg $ 2.50/kg $ 1.00/kg $ 3.00/kg $3,000,000 $1,500,000 900,000 kg 300,000 kg 2012 $11.20/kg 1.65/kg s 2.75/kg $1.10/kg s 3.30/kg $3,300,000 $1,500,000 1,000,000 kg 600,000 kg