Tanck Electric Motors is a division of Tanck Electric Products Corporation. The division manufactures and sells an electric motor used in a wide variety of applications. During the coming year it expects to sell 50,000 units for $30 per unit. Kerry Starr is the division manager. She is considering producing either 50,000 or 80,000 units during the period. Other information is presented in the schedule.

Instructions

(a) Prepare an absorption costing income statement, with one column showing the results if 50,000 units are produced and one column showing the results if 80,000 units are produced.

(b) Prepare a variable costing income statement, with one column showing the results if 50,000 units are produced and one column showing the results if 80,000 units are produced.

(c) Reconcile the difference in net incomes under the two approaches and explain what accounts for this difference.

(d) Discuss the relative usefulness of the variable costing income statements versus the absorption costing income statements for decision making and for evaluating the manager'sperformance.

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Division Information for 2012 Beginning inventory Expected sales in units Selling price per unit Variable manufacturing costs per unit Fixed manufacturing overhead costs (total) Fixed manufacturing overhead costs per unit: 0 50,000 $30 $12 $400,000 Based on 50,000 units Based on 80,000 units $8 per unit $400,000 50,000) $5 per unit ($400,000 ÷ 80,000) Manufacturing cost per unit: $20 per unit ($12 variable $8 fixed) $17 per unit ($12 variable +$5 fixed) $2 $40,000 Based on 50,000 units Based on 80,000 units Variable selling and administrative expenses Fixed selling and administrative expenses (total)