Granison Inc, a manufacturing company, uses Absorption costing to measure income. In 2014, Granison produced and sold 10 million units. The following information is available about operations in 2014:
Sales Revenue ($6 price x 10,000,000 units).............................$60,000,000
Cost of goods sold *............................................................................68,000,000
Gross margin........................................................................................(8,000,000)
Variable selling and admin exps ($1 x 10,000,000 units)............10,000,000
Net operating loss.............................................................................($18,000,000)
*Variable cost of goods sold (materials, labor, overhead) $2 x 10,000,000 units plus fixed manufacturing overhead of $48,000,000.
An industry consultant approached the company and offered to assist with a ‘turnaround'. The consultant agreed to become the president for no fixed salary, only a year-end bonus of 10% of operating profit (before considering the bonus). The board of directors agreed to the terms and hired the consultant as the new president.
The new president immediately increased production to 30 million units in 2015. Sales volume in 2015 remained at 10 million units. The selling price, all variable costs per unit and total fixed costs remained constant. After posting a profit in 2015, the president resigned and moved on to a new challenge with another company. He received a similar contract to the one he had with Granison.
Required
1. Use Absorption costing to prepare an income statement for 2015 and determine the net operating income before the bonus. What bonus amount is the president entitled to?
2. Use Variable costing to prepare an income statement for 2014.
3. Use Variable costing to prepare an income statement for 2015.
4. Which method (Absorption costing or Variable costing) best presents the president's 2015 performance? Explain.