Question

Santana Rey expects sales of Business Solutions’s 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

1. 1. Income under Absorption costing income statement for 300 workstations is $467,000 and for 320 workstations is $500,000.
2. Income under Variable costing income statement for 300 workstations is $495,000 and for 320 workstations is $$528,000.
3. The difference for 300 workstations is $9,000 ($495,000- $486,000) and for 320 workstations is $8,000 ($528,000- $520,000).

Step-by-step solution

Absorption costing income statement-

Business Solution

Absorption costing income statement

	300	320
Sales	$900,000	$960,000
Less: Cost of Goods sold
Direct material	$240,000	$256,000
Direct labor	$120,000	$128,000
Variable overhead	$30,000	$32,000
Fixed overhead	$24,000	$24,000
	$414,000	$440,000
Gross profit	$486,000	$520,000
Less: Selling expenses
Variable selling expenses	$15,000	$16,000
Fixed selling expenses	$4,000	$4,000
	$19,000	$20,000
Income	$467,000	$500,000

Variable costing income statement-

Business Solution

Variable costing income statement

	300	320
Sales	$900,000	$960,000
Less: Variable Costs
Direct material	$240,000	$256,000
Direct labor	$120,000	$128,000
Variable overhead	$30,000	$32,000
Variable selling expenses	$15,000	$16,000
	$405,000	$432,000
Income	$495,000	$528,000

Analysis-

Gross profit is a measure of profitability under absorption costing it is lower than the contribution margin under variable costing. A high contribution margin under variable costing indicates a business is more profitable. The gross profit of the company is $486,000 for 300 workstations and $520,000 for 320 workstations. The contribution margin is $495,000 for 300 workstations and $528,000 for 320 workstations.