QUESTION C: Absorption vs variable costing income statements[1]

Handlebar Air produces mountain bike seats. The company recently hired a new production manager, Jamie Abubaca, to handle production and sales of a seat called the ErinWave. Jamies compensation depends on the gross margin associated with sales of the seat. Jamie needs to decide how many seats to produce. The following budgeted information is related to this product.

Budgeted sales 50,000 seats

Beginning inventory 0 seats

Average selling price $150 per seat

Variable production costs $ 90 per seat

Budgeted fixed production costs $750,000 per year

1. Calculate the expected gross margin if Jamie produces 50,000, 65,000 or 70,000 seats and sales remain the same. (Remember to include the production-volume variance as part of the cost of goods sold)

Hints:

• This question is similar to question A(5) in group assignment 5. What happens to COGS and ending inventory when production activity levels are changed AND sales remain the same.
• NOTE: Sales and COGS are always the same for each planned activity level. The only change will be the production volume variance.
• Use the table below to help complete the work

	50,000 seats produced	65,000 seats produced	70,000 seats produced
Revenue (always 50,000 seats)	$	$	$
COGS calculation
COGS (50,000 seats)	$	$	$
Production Volume variance	$	$	$
Net COGS	$	$	$
Gross Margin	$	$	$

2. Calculate the ending inventory in units and in dollars for each production level.
3. Why would Jamie want to maximize production (Diagnostic analysis use key figures to explain)?
4. Explain two ways in which management can control overproduction. (Prescriptive analysis no key figures required)

[1] Based on Problem 9-33 page 370