Problem: Hawthorne Golf, the maker of a sought-after set of golf clubs, was formed in 2012. The selling price for each golf club set is $1,700, variable production costs are $900 per unit, fixed production costs are $2,100,000 per year, and fixed selling and administrative costs are $2,275,000 per year. Data below indicate net income for 2012-2014 under full costing.
In 2012 and 2013, Milo Hawthrone, Jr., was the president of Hawthorne Golf. The board of directors was generally pleased with the company's performance under his leadership-the company hit the break-even point in its first year of operation and had a modest profit in 2013. Milo quit at the end of 2013 and went on to buy a golf course and open a pro shop. His replacement, Daryl Selmer was apparently not as successful as Milo. Daryl argued that he was improving the company by getting rid excess inventory, but the board noted that the company showed a $185,000 loss in the first year of his leadership.
|
|
2012
|
2013
|
2014
|
|
Production (Units)
|
7,000
|
7,000
|
2,800
|
|
Sales (Units)
|
4,550
|
5,550
|
6,700
|
|
Production cost per unit
|
$1,200
|
$1,200
|
$1,650
|
|
|
|
|
|
|
Sales
|
$7,735,000
|
$9,435,000
|
$11,390,000
|
|
Less cost of goods sold
|
5,460,000
|
6,660,000
|
9,300,000
|
|
Gross margin
|
2,275,000
|
2,775,000
|
2,090,000
|
|
Less selling and administrative expense
|
2,275,000
|
2,275,000
|
2,275,000
|
|
Net income (Loss)
|
$0
|
$500,000
|
($185,000)
|
a. Recalculate net income for all three years using variable costing.