Dilithium Batteries is a division of Enterprise Corporation

P6-8A Dilithium Batteries is a division of Enterprise Corporation. The division manufactures and sells a long-life battery used in a wide variety of applications. During the coming year it expects to sell 60,000 units for $30.00 per unit. Nyota Uthura is the division manager. She is considering producing either 60,000 or 90,000 units during the period. Other information is presented in the schedule.

Division Information for 2014
Beginning inventory 0
Expected sales in units 60,000
Selling price per unit $30.00
Variable manufacturing costs per unit $12.00
Fixed manufacturing overhead costs (total) $540,000
Fixed manufacturing overhead costs per unit:
Based on 60,000 units ($540,000 ÷ 60,000 units) $9.00
Based on 90,000 units ($540,000 ÷ 90,000 units) $6.00
Manufacturing cost per unit:
Based on 60,000 units ($12.00 variable + $9.00 fixed) $21.00
Based on 90,000 units ($12.00 variable + $6.00 fixed) $18.00
Variable selling and administrative expenses $2.00
Fixed selling and administrative expenses (total) $50,000

 

 

Instructions

(a) Prepare an absorption costing income statement, with one column showing the results if 60,000 units are produced and one column showing the results if 90,000 units are produced.

(b) Prepare a variable costing income statement, with one column showing the results if 60,000 units are produced and one column showing the results if 90,000 units are produced.

(c) Reconcile the difference in net incomes under the two approaches and explain what accounts for this difference.

(d) Discuss the relative usefulness of the variable costing income statements versus the absorption costing income statements for decision making and for evaluating the manager’s performance.

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