Reference no: EM131816915

Question 1 - Torres Company began operations this year. During this first year, the company produced 100,000 units and sold 80,000 units. The absorption costing income statement for its first year of operations follows.

Sales (80,000 units × $45 per unit)		$3,600,000
Cost of goods sold
Beginning inventory	$0
Cost of goods manufactured (100,000 units × $25 per unit)	2,500,000
Cost of good available for sale	2,500,000
Ending inventory (20,000 × $25)	500,000
Cost of goods sold		2,000,000
Gross margin		1,600,000
Selling and administrative expenses		560,000
Net income		$1,040,000

Additional Information

a. Selling and administrative expenses consist of $400,000 in annual fixed expenses and $2 per unit in variable selling and administrative expenses.

b. The company's product cost of $25 per unit is computed as follows.

Direct materials	$3 per unit
Direct labor	$10per unit
Variable overhead	$4 per unit
Fixed overhead ($800,000 / 100,000 units)	$8 per unit

Required: Prepare an income statement for the company under variable costing.

Question 2 - Powell Company produces a single product. Its income statement under absorption costing for its first two years of operation follow.

	2010	2011
Sales ($46 per unit)	$1,150,000	$2,070,000
Cost of goods sold ($31 per unit)	775,000	1,395,000
Gross margin	375,000	675,000
Selling and administrative expenses	307,500	357,500
Net income	$67,500	$317,500

Additional Information

a. Sales and production data for these first two years follow.

	2010	2011
Units produced	35,000	35,000
Units sold	25,000	45,000

b. Variable cost per unit and total fixed costs are unchanged during 2010 and 2011. The company's $31 per unit product cost consists of the following.

Direct materials	$4
Direct labor	8
Variable overhead	9
Fixed overhead ($350,000/35,000 units)	10
Total product cost per unit	$31

c. Selling and administrative expenses consist of the following.

	2010	2011
Variable selling and administrative ($2.5 per unit)	$62,500	$112,500
Fixed selling and administrative	245,000	245,000
Total selling and administrative	$307,500	$357,500

Required -

1. Prepare income statements for the company for each of its first two years under variable costing.

2. What are the difference between the absorption costing income and the variable costing income for these two years.

Question 3 - Winter Garden is a luxury hotel with 155 suites. Its regular suite rate is $230 per night per suite. The hotel's cost per night is $155 per suite and consists of the following.

Variable direct labor and materials cost	$53
Fixed cost [($5,770,000/155 suites) ÷ 365 days]	102
Total cost per night per suite	$155

The hotel manager received an offer to hold the local Bikers' Club annual meeting at the hotel in March, which is the hotel's low season with an occupancy rate of under 55%. The Bikers' Club would reserve 45 suites for three nights if the hotel could offer a 55% discount, or a rate of $103 per night. The hotel manager is inclined to reject the offer because the cost per suite per night is $155. The manager believes that if 45 suites are offered at the rate of $7,020 per night for three nights, the hotel would lose $7,020, computed as ($103 - $155) × 45 suites × 3 nights.

Required:

Prepare an analysis of this offer for the hotel manager.

Should the offer from the Bikers' Club be accepted or rejected?

Question 4 - Safety Chemical produces and sells an ice-melting granular used on roadways and sidewalks in winter. It annually produces and sells about 100 tons of its granular. In its nine-year history, the company has never reported a net loss. However, because of this year's unusually mild winter, projected demand for its product is only 65 tons. Based on its predicted production and sales of 65 tons, the company projects the following income statement (under absorption costing). 

Sales (65 tons at $20,500 per ton)	$1,332,500
Cost of goods sold (65 tons at $15,500 per ton)	1,007,500
Gross margin	325,000
Selling and administrative expenses	345,150
Net loss	$(20,150)

Its product cost information follows and consists mainly of fixed cost because of its automated production process requiring expensive equipment.

Variable direct labor and material costs per ton	$4,115
Fixed cost per ton ($740,000 ÷ 65 tons)	11,385
Total product cost per ton	$15,500

Selling and administrative expenses consist of variable selling and administrative expenses of $310 per ton and fixed selling and administrative expenses of $325,000 per year. The company's president is concerned about the adverse reaction from its creditors and shareholders if the projected net loss is reported. The operations manager mentions that since the company has large storage capacity, it can report a net income by keeping its production at the usual 100-ton level even though it expects to sell only 65 tons. The president was puzzled by the suggestion that the company can report income by producing more without increasing sales.

Required:

1. Can the company report a net income by increasing production to 100 tons and storing the excess production in inventory?

2. Prepare an income statement (using absorption costing) based on production of 100 tons and sales of 65 tons.