How does the choice of capacity level impact income

Questions:

Question-1

Consider the following information:

 Q1 Q2 Q3 Beginning inventory (units) 0 500 500 Budgeted units to be produced 25,000 25,000 25,000 Actual units produced 25,000 24,700 25,200 Units sold 24,500 24,700 25,400 Variable manufacturing costs per unit produced \$70 \$70 \$70 Variable selling costs per unit sold \$20 \$20 \$20 Fixed manufacturing costs \$2,000,000 \$2,000,000 \$2,000,000 Fixed selling costs \$1,000,000 \$1,000,000 \$1,000,000 Selling price per unit \$260 \$260 \$260

There are no price, efficiency, or spending variances, and any production-volume variance is directly written off to cost of goods in the quarter in which it occurs.

a) Prepare income statements for Q1, Q2, and Q3 using variable costing and absorption costing.

b) Explain the differences in operating income between the two costing systems for each quarter. Be specific!

Question-2

a) How does the choice of capacity level (denominator level) impact income reported under variable costing? Be specific!

b) How does the choice of capacity level (denominator level) impact income reported under full absorption costing? Be specific!

Question-3

A firm expects to sell 78,000 units of its product annually. It estimates that it costs \$700 to place an order and that each unit costs \$8 annually to carry in inventory. It takes 2 weeks to receive an order once it is placed.

a) How many units should the firm order at a time if it wants to minimize the sum of ordering and carrying costs?

b) How many orders will it place in a year?

c) What will its average inventory level be during the year?

d) What is its reorder point?

#### Solution Preview :

##### Reference No:- TGS02051885

Now Priced at \$10 (50% Discount)

Recommended (93%)

Rated (4.5/5)