Question: Problem 5.4 (LO1, 2) Variable and Full Costing: Earnings Management with Full Costing; Changes in Production and Sales Sampson Steel produces high-quality worktables. The company
Problem 5.4 (LO1, 2) Variable and Full Costing: Earnings Management with Full Costing; Changes in Production and Sales Sampson Steel produces high-quality worktables. The company has been in operation for three years, and sales have declined each year due to increased competition. The following information is available:
| 2020 | 2021 | 2022 | Total | |
| Units sold | 10,000 | 9,000 | 8,000 | 27,000 |
| Units produced | 10,000 | 10,000 | 7,000 | 27,000 |
| Fixed production costs | $350,000 | $350,000 | $350,000 |
|
| Variable production costs per unit | $100 | $100 | $100 |
|
| Selling price per unit | $350 | $350 | $350 |
|
| Fixed selling and administrative expenses | $300,000 | $300,000 | $300,000 |
|
Required
- Calculate profit and the value of ending inventory for each year under full costing.
- Calculate profit and the value of ending inventory for each year under variable costing.
- Explain how management of Sampson could manipulate earnings in 2021 by producing more units than are actually needed to meet demand. Could this approach to earnings management be repeated year after year?
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