The questions below pertain to two different scenarios involving a manufacturing company. In each scenario, the cost structure of the company is constant form year to year.Selling prices, unit variable costs, and total fixed ocsts are the same in every year. However, unit sales and/or unit produciton levels may vary from year to year.
1. Cosider the following data for scenario A:
Year 1 Year 2 Year 3
Variable costing net operating income.... $41,694 $41,694 $41,694
Absorption net operating income............ $41,694 $66,755 $20,036
a. Were unit sales constant from year to year? Explain
b. What was the relation between unit sales and unit production levels in each year? For each
year, indicate wheter inventories grew or shrank.
2. Consider the following data for Scenario B:
Year 1 Year 2 Year 3
Variable costing net operating income.... $41,694 ($29,306) ($100,306)
Absorption net operating income............ $41,694 $42,165 $43,637
a. Were unit sales constant from year to year? Explain
b. What was the relation between unit sales and unit production levels in each year? For each year, indicate wheter inventories grew or shrank.
3. Given the patterns of net operating income in scenarios A and B above, which costing method, variable costing or absorption costing, do you believe provides a better reflection of economic reality? Explain