Sweet and Sour is a manufacturer of Widgets. The following information is about the company's first two years of operation:

Units produced 10,000 (2019) & 6,000 (2020) 16,000 (Total over two year period. Units sold 8,000 (2019) & 8,000 (2020) 16,000 (total over two year period.
Selling price per unit $3,000 Direct material per unit $ 700 Direct labor per unit $1,300 Variable manufacturing overhead per unit $ 200 Fixed manufacturing overhead per year $ 2,000,000 Fixed selling and administrative expense per year $ 1,000,000 - Fixed and variable costs remain the same over the two year period.

In its first year of operation, the company produced 10,000 kits, but was only able to sell 8,000 units. In its second year, the company needed to get rid of excess inventory (the extra 2,000 units produced but not sold the previous year) so it cut back production to 6,000 units.
a) Calculate profit for both years using full (absorption) costing.
b) Note that profit declined in 2020. Is company performance actually worse in 2020 compared to 2019?
c) Calculate profit for both years using variable costing.
d) Does variable costing profit represent a more realistic view of firm performance in the two years? Explain.
e) Reconcile the difference in profit between the two income statements. Be specific and provide your calculations

Answer rating: 100% (QA)

Product Cost for 2019 Direct materials Direct labor Variable Manufacturing overhead Fixed manufactur... View the full answer