Problem 5-1
Variable and Full Costing: Sales Constant but Production Fluctuates
Spencer Electronics produces a wireless home lighting device that allows consumers to turn on home lights from their cars and light a safe path into and through their homes. Information on the first three years of business is as follows:
	2014	2015	2016	Total
Units sold	$ 20,000	$ 20,000	$ 20,000	$ 60,000
Units produced	$ 20,000	$ 25,000	$ 15,000	$ 60,000
Fixed production costs	$ 750,000	$ 750,000	$ 75,000
Variable production costs per unit	$ 150	$ 150	$ 150
Selling price per unit	$ 250	$ 250	$ 250
Fixed selling and administrative expense	$ 220,000	$ 220,000	$ 220,000
Required
a. Calculate profit and the value of ending inventory for each year using full costing
b. Explain why profit fluctuates from year to year even though the number of units sold, the selling price, and the cost structure remain constant.
c. Calculate profit and the value of ending inventory for each year using variable costing.
d. Explain why, using variable costing, profit does not fluctuate from year to year.