General Electric (GE) bases most of its US production out of the GE Appliance Park in Louisville, Kentucky. Building One at Appliance Park (abbreviated as AP1) manufactures both washers and dryers. While there are several different models of each, for purposes of this problem, assume that all washers are identical and that all dryers are identical. AP1 uses a standard costing system, in which estimation error is NOT allocated to specific cost objects. AP1 uses a weighted average cost approach over all of its inventory and allocates fixed overhead based on direct labor hours.

As of August 31, 2024, AP1 has finished goods inventory consisting of 400 washers and 800 dryers. The value of this inventory, under absorption costing, on AP1's balance sheet as of 8/31/24 includes $262,000 of fixed overhead costs for the washers and $369,600 of fixed overhead costs for the dryers.

For the month of September, 2024, AP1 expects to produce 5,000 washers and 5,000 dryers, using 30,000 direct labor hours for the washers and 25,000 direct labor hours for the dryers. Due to the residual effects of a large fire in April, actual output is only 4,000 washers and 3,000 dryers. Direct labor hours are 29,000 for the washers and 21,000 for the dryers. Total fixed overhead for the plant is expected to be $5,500,000. Actual fixed overhead is $5,700,000.

AP1 sells 4,200 washers and 3,300 dryers during September (all other appliances are in finished goods inventory as of September 30, 2024).

1. Assuming that AP1 uses absorption costing, how much fixed overhead will be included in a) finished goods inventory on the 9/30/24 balance sheet? __________ b) cost of goods sold on the income statement for the month ended 9/30/24? __________ (20 points)

2. Assuming that AP1 uses (and has always used) variable costing, how much fixed overhead will be included in: a) finished goods inventory on the 9/30/24 balance sheet? __________ b) cost of goods sold on the income statement for the month ended 9/30/24? __________ (10 points) 3. During 2025 (i.e., next year), GE expects to rapidly increase production at AP1. Sales in 2025 will stay at 2024 levels, however, leading to a large increase in inventory. In 2026, GE expects sales to rise rapidly, while production remains similar to that in 2025. This will reduce inventory during 2026 back down to a reasonable level. The plant manager is concerned about the effects that these changes will have on her gross margin (revenue minus cost of goods sold divided by revenue) during the next two years, and wonders if the choice of absorption or variable costing would matter. Assume that other than volume, nothing else is likely to change over the next two years. (10 points)

a. What would you predict will happen to gross margins during 2025 under:

Absorption costing: Increase Remain constant Decrease Variable costing: Increase Remain constant Decrease Briefly (one or two sentences) explain your reasoning:

b. What would you predict will happen to gross margins during 2026 under:

Absorption costing: Increase Remain constant Decrease Variable costing: Increase Remain constant Decrease

Briefly (one or two sentences) explain your reasoning: