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?

 

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Accounting Basics: How does the choice of capacity level impact income
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