Absorption costing does not distinguish between variable and fixed costs. All manufacturing costs are included in the cost of goods sold.

Saxon, Inc.

Absorption Costing Income Statement

For the Year Ended December 31

1	Sales		$1,125,000.00
2	Cost of goods sold:
3	Beginning inventory	$0.00
4	Cost of goods manufactured	840,000.00
5	Ending inventory	(210,000.00)
6	Total cost of goods sold		630,000.00
7	Gross profit		$495,000.00
8	Selling and administrative expenses		275,000.00
9	Income from operations		$220,000.00

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Contribution Margin Analysis

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Contribution margin analysis focuses on explaining the differences between planned and actual contribution margins, considering the quantity factor and the unit price factor.

After reviewing the data on the Contribution Margin Data panel, complete the following contribution margin analysis. For those boxes in which you must enter subtracted or negative numbers use a minus sign.

Score: 4/44

Saxon, Inc.

Contribution Margin Analysis

For the Year Ended December 31

1	Planned contribution margin
2	Effect of changes in sales:
3	Sales quantity factor
4	Unit price factor
5	Total effect of changes in sales
6	Effect of changes in variable cost of goods sold:
7	Variable cost quantity factor

Under variable costing, the cost of goods manufactured includes only variable manufacturing costs. This type of income statement includes a computation of manufacturing margin.

Saxon, Inc.

Variable Costing Income Statement

For the Year Ended December 31

1	Sales		$1,125,000.00
2	Variable cost of goods sold:
3	Beginning inventory	$0.00
4	Variable cost of goods manufactured	600,000.00
5	Ending inventory	(150,000.00)
6	Total variable cost of goods sold		450,000.00
7	Manufacturing margin		$675,000.00
8	Variable selling and administrative expenses		210,000.00
9	Contribution margin		$465,000.00
10	Fixed costs:
11	Fixed manufacturing costs	$240,000.00
12	Fixed selling and administrative expenses	65,000.00
13	Total fixed costs		305,000.00
14	Income from operations		$160,000.00

Use the income statements on the Absorption Statement and Variable Statement panels to complete the following table for the original production level. Then prepare similar income statements at a production level 10,000 units higher and add that information to the table. Assume that total fixed costs, unit variable costs, unit sales price, and the sales levels are the same at both production levels.

Income From Operations
Original	Original	Additional	Additional
Production	Production	10,000	10,000
Level-Absorption	Level-Variable	Units-Absorption	Units-Variable

Points:

0 / 4

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Check My Work

Following the examples on the Absorption Statement and Variable Statement panels, recompute income from operations under the absorption and variable cost methods, given that the additional units are manufactured. Dont forget that fixed costs will remain the same at any production level within the relevant range.

2. What is the change in income from operations from producing 10,000 additional units under absorption costing?

Points:

0 / 1

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Check My Work

Review your chart and determine the change in income from operations, focusing only on the change in absorption costing amounts.

3. What is the change in income from operations from producing 10,000 additional units under variable costing?

Points:

0 / 1

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Check My Work

Review your chart and determine the change in income from operations, focusing only on the change in variable costing amounts.

4. What would be your recommendation to the production manager?

Produce the extra 10,000 units. It's always a good idea to have extra units on hand and keep the factory operating at capacity, even if all the units are not sold.

Produce the extra 10,000 units. Income from operations will be increased, and the production manager will receive praise for creating higher profits.

Do not produce the extra 10,000 units. Income from operations does not change under absorption costing when the additional units are produced.

Do not produce the extra 10,000 units. The increase in income from operations under absorption costing is due to fixed manufacturing costs being held in inventory, and the additional inventory will lead to higher handling, storage, financing, and obsolescence costs.

Points:

1 / 1

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Contribution margin analysis focuses on explaining the differences between planned and actual contribution margins, considering the quantity factor and the unit price factor.

After reviewing the data on the Contribution Margin Data panel, complete the following contribution margin analysis. For those boxes in which you must enter subtracted or negative numbers use a minus sign.

Score: 4/44

Saxon, Inc.

Contribution Margin Analysis

For the Year Ended December 31

1	Planned contribution margin
2	Effect of changes in sales:
3	Sales quantity factor
4	Unit price factor
5	Total effect of changes in sales
6	Effect of changes in variable cost of goods sold:
7	Variable cost quantity factor
8	Unit cost factor
9	Total effect of changes in variable cost of goods sold
10	Effect of changes in selling and administrative expenses:
11	Variable cost quantity factor
12	Unit cost factor
13	Total effect of changes in selling and administrative expenses
14	Actual contribution margin

Points:

1 / 11

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