Question

Santana Rey expects sales of Business Solutions’ line of computer workstation furniture to equal 300 workstations (at a sales price of \(3,000 each) for 2018. The workstations’ manufacturing costs include the following.

Direct materials	\)800 per unit
Direct labor	\(400 per unit
Variable overhead	\)100 per unit
Fixed overhead	\(24,000 per year

The selling expenses related to these workstations follow.

Variable selling expenses	\)50 per unit
Fixed selling expenses	$4,000 per year

Santana is considering how many workstations to produce in 2018. She is confident that she will be able to sell any workstations in her 2018 ending inventory during 2019. However, Santana does not want to overproduce as she does not have sufficient storage space for many more workstations.

Required

1. Compute Business Solutions’s absorption costing income assuming

a. 300 workstations are produced.

b. 320 workstations are produced.

2. Compute Business Solutions’s variable costing income assuming

a. 300 workstations are produced.

b. 320 workstations are produced.

3. Explain to Santana any differences in the income figures determined in parts 1 and 2. How should Santana use the information from parts 1 and 2 to make production decisions?

Short answer

Particulars	Amounts ($)
Net income under absorption costing:
At 300 units	467,000
At 320 units	468,500
Net income under variable costing:
At 300 units	467,000
At 320 units	467,000

Step-by-step solution

Meaning of Cost of Goods Sold

The cost of goods sold refers to the total cost associated with the production of goods. The total cost includes all thedirect and indirect expenses incurred by a business entity to produce such products.

Preparation of absorption costing income statement

Santana Rey
Absorption Costing Income Statement
	Production Volume
	300 Workstations	320 Workstations
Particulars	Amounts ($)	Amounts ($)
Sales (300*3000)	900,000	900,000
Cost of goods sold (Working Note)	414,000	412,500
Gross profit	486,000	487,500
Variable selling expenses @ $50 per unit	15,000	15,000
Fixed selling expenses	4,000	4,000
Net income	$467,000	$468,500

Working Note:

Computation of cost of goods sold:

	Production Volume
	300 Workstations	320 Workstations
Particulars	Amounts ($)	Amounts ($)
Direct materials	800	800
Direct labor	400	400
Variable overhead	100	100
Fixed overhead	24000/300= 80	24000/320=75
Cost per unit	$1,380	$1,375
Number of units sold	300	300
Cost of goods sold	$414,000	$412,500

 Preparation of variable costing income statement

Santana Rey
Variable Costing Income Statement
	Production Volume
	300 Workstations	320 Workstations
Particulars	Amounts ($)	Amounts ($)
Sales (300*3000)	900,000	900,000
Variable costs:
Direct materials @ 800 per unit	240,000	240,000
Direct labor @ 400 per unit	120,000	120,000
Variable overhead @ 100 per unit	30,000	30,000
Variable selling and administrative expenses @ 50 per unit	15,000	15,000
Contribution margin	495,000	495,000
Fixed costs:
Fixed overhead	24,000	24,000
Fixed selling and administrative expenses	4,000	4,000
Net income	$467,000	$467,000

Explanation of the difference

As per the above income statements, the difference between incomes under absorption costing and variable costing is that absorption costing facilitates the administration of the business to determine whether the net income will increase or decreaseby making variations in the production quantity.On the other hand, income under variable costing remains unaffected by increasing or decreasing production volume.