Required

a. Prepare income statements based on full absorption costing and based on variable costing. Based

on the reported incomes using these methods, did Smooth Ride exceed the expectations of Ben

and Chris?

b. Smooth Ride follows generally accepted accounting standards. Which method, full absorption or

variable costing, will the company use to report its net income?

Business Decision Case Ben and Chris have been lifelong friends. They are engineer-minded and

have always dreamed of starting a manufacturing company. They want to manufacture tires, but

realize that this industry is heavily regulated and that achieving profitable operations will require

skillful management. Despite the odds, they form Smooth Ride, Inc., and resolve to only stay in

business if they report a positive net income after the companys first year of operations. At the end

of 2016, its first year of operations, Smooth Ride reported the following summarized data:

Sales (105,000 tires)....................................... $13,125,000

Production costs (120,000 tires):

Direct material.......................................... 4,750,000

Direct labor ............................................ 3,675,000

Manufacturing overhead:

Variable ............................................... 2,300,000

Fixed ................................................. 950,000

Operating expenses:

Variable ............................................... 1,050,000

Fixed ................................................. 800,000

Depreciation on machinery ................................. 455,000

Property taxes ........................................... 330,000

Personnel department expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140,000