Grehan Company produces and sells wooden pallets that are used in moving and stacking materials. The operating costs for the past year were as follows:
Variable costs per unit:
Direct materials $3.60
Direct labor 2.00
Variable overhead 0.40
Variable selling expenses 0.30
Fixed costs per year:
Fixed overhead $180,000
Fixed selling and administrative 70,000
During the year, Grehan produced 200,000 wooden pallets and sold 207,000 at $10 each. Grehan had 9,300 pallets in beginning finished goods inventory; costs have not changed from last year to this year. An actual costing system is used for product costing.
Required
1. What per-unit inventory cost will be reported on Grehan's balance sheet at the end of the year? What will be the reported income?
2. What would the per-unit inventory cost be under variable costing? Does this differ from the unit cost computed in Requirement 1? Why? What would income be using variable costing?
3. Reconcile the difference between the variable-costing and absorption-costing income figures.
4. Suppose that Grehan Company had sold 196,700 pallets during the year. What is the absorption-costing income? What is the variable-costing income?
5. Reconcile the difference between the variable-costing and absorption-costing income figures in requirement 4.