Big Sports Manufacturing produces basketballs used for indoor or outdoor games. The company has had significant troubles over the past few years, as the number of competitors in the basketball market has increased dramatically. Recently, the company was forced to cut back production in order to decrease its rising inventory level. The following is a list of costs for the company in 2012:
Variable costs per unit
Rubber ........................................................ $ 2.75
Other materials-indirect .................................... 1.40
Ball makers-direct labour ................................... 5.60
Factory electricity usage ....................................... 0.50
Factory water usage ............................................ 0.15
Other labour-indirect .......................................... 0.27
Selling and administrative expenses .......................... 0.40
Fixed costs per year
Factory property taxes .................................... $120,000
Factory sewer usage ........................................... 50,000
Factory electricity usage........................................ 40,000
Selling and administrative expenses ......................... 83,000
Big Sports Manufacturing had an ending inventory of 85,000 basketballs in 2011. For these units, the fixed manufacturing overhead cost was $4.00 per unit and variable manufacturing costs were $9.67 per unit. In 2012, the company produced 35,000 basketballs, sold 72,500 basketballs, and had an ending inventory of 47,500 units. The basketballs sold for $18 each. Big Sports uses the FIFO method.
Instructions
(a) Calculate Big Sports' manufacturing cost per unit under a variable-costing system.
(b) Prepare a variable-costing income statement for 2012.
(c) Calculate Big Sports' manufacturing cost per unit under a throughput-costing system.
(d) Prepare a throughput-costing income statement for 2012. Assume that increased costs in 2012 are related to variable costs other than materials.
(e) Calculate Big Sports' manufacturing cost per unit under absorption costing.
(f) Prepare an absorption-costing income statement for 2012.
(g) Big Sports' chief financial officer, Mr. Swetkowski, is contemplating the benefits of using the absorption-costing and variable-costing approaches. He has asked you to perform a variety of tasks to help him analyze the differences between the two approaches:
1. Reconcile the differences between the income values of the two approaches.
2. Mr. Swetkowski has heard that some basic managerial tasks can be better performed when variable costing is used.
Calculate the break-even point in units for the company in 2012 using the variable-costing data.
3. Mr. Swetkowski has been very impressed with the variable-costing techniques that he has seen so far. He has been thinking of eliminating absorption costing for the company. What do you think of this idea?