Waterways Continuing Problem-8 (Part Level Submission)

When Waterways management met to review the year-end financial statements, the room was filled with excitement. Sales had been exceptional during the year and every department had exceeded the budget and last years sales totals. Several years ago Waterways had implemented a bonus system based on percentage of sales over budget, and the managers were expecting healthy cheques at the end of the year. Yet the plant manager, Ryan Smith, was stunned into silence when he read the bottom line on the income statement for manufacturing operations. It was showing a loss! He immediately approached the CFO asking for an explanation. Ryan wondered, Why did we go through all that trouble and inconvenience to adopt those cost-cutting measures when they had the opposite effect? One of those measures was to move toward lean manufacturing. The CFO retrieved the following information with respect to the top-selling line from the manufacturing operations for the last three years. Production on this line began on January 1, 2014:

		2014		2015		2016
Beginning inventory of finished units		0
Production in units		72,000		73,800		59,040
Sales in units		62,000		63,800		79,040
Selling price		$29		$29		$31
Direct material		$3		$3		$4
Direct labour		5		5		6
Variable manufacturing overhead		4		4		4
Variable selling and administration		5		5		5
Fixed manufacturing overhead		590,400		590,400		590,400
Fixed selling and administration		120,000		120,000		120,000

Waterways uses the absorption-costing method and accounts for inventory using FIFO.

QUESTION B: Using the information provided, prepare condensed, three-year comparative income statements using the variable-costing method (SEE ATTACHED TEMPLATE)

QUESTION C: Reconcile the variable-costing income with the absorption-costing income calculated in part (a1) (See attached answer for (a1) and the template for this question below. I did Question (A1) on my own as given below).

WATERWAYS CORPORATION Variable Costing Income Statement For the years ending December 31 2014 2015 2016 Variable Costs Cost of Goods Sold Beginning Inventory Add O. Cost of Goods Manufactured Cost of Goods Available for Sale : | Ending Inventory Less Selling and Administration Total Variable Costs Contribution Margin Less Fixed Costs Operating Income / (Loss)