Absorption Costing and Variable Costing

Roessler Scandinavia is a new division of Roessler International. The division manufactures spangles in a single manufacturing facility. Following is pertinent data for 2005, its first year of operations (hence, there is no beginning inventory).

Annual factory capacity (in units): 300,000

Units manufactured in 2005: 240,000

Sales demand: 180,000

Variable manufacturing cost per unit: $12

Fixed manufacturing overhead costs: $1,450,000

Variable non-manufacturing costs per unit: $3

(this is a sales commission)

Fixed non-manufacturing costs: $110,000

Sales price per unit: $ 30

The sales demand, per-unit sales price, per-unit variable manufacturing cost, per-unit sales commission, and total fixed non-manufacturing costs are all expected to remain unchanged in 2006 from 2005. Fixed manufacturing overhead costs are expected to increase by 10%.

Required:

Calculate 2005 income and projected 2006 income under Absorption Costing, under each of the following sets of assumptions:

The company accounts for inventory using FIFO, allocates fixed manufacturing overhead costs based on units produced, manufactures at capacity in 2006.