Saxon, Inc. Absorption Costing Income Statement For the Year Ended December 31 1 Sales $1,125,000.00 2 Cost of goods sold: 3 Beginning inventory $0.00 4 Cost of goods manufactured 840,000.00 5 Ending inventory (210,000.00) 6 Total cost of goods sold 630,000.00 7 Gross profit $495,000.00 8 Selling and administrative expenses 275,000.00 9 Income from operations $220,000.00 Saxon, Inc. Variable Costing Income Statement For the Year Ended December 31 1 Sales $1,125,000.00 2 Variable cost of goods sold: 3 Beginning inventory $0.00 4 Variable cost of goods manufactured 600,000.00 5 Ending inventory (150,000.00) 6 Total variable cost of goods sold 450,000.00 7 Manufacturing margin $675,000.00 8 Variable selling and administrative expenses 210,000.00 9 Contribution margin $465,000.00 10 Fixed costs: 11 Fixed manufacturing costs $240,000.00 12 Fixed selling and administrative expenses 65,000.00 13 Total fixed costs 305,000.00 14 Income from operations $160,000.00 For planning and control purposes, managers often compare planned and actual contribution margin. Variable costing is used as a basis for such analyses. Examine the following contribution margin data, and then complete the Contribution Margin Analysis panel. Saxon, Inc. Contribution Margin Data Schedule Actual Planned Sales $1,125,000 $1,190,000 Variable cost of goods sold $450,000 $462,000 Variable selling and administrative expenses 210,000 154,000 Total $660,000 $616,000 Contribution margin $465,000 $574,000 Number of units sold 15,000 14,000 Per unit: Sales price $75.00 $85.00 Variable cost of goods sold 30.00 33.00 Variable selling and administrative expenses 14.00 11.00 The production manager for Saxon, Inc. is worried because the company is not showing a high enough profit. Looking at the income statements on the Absorption Statement panel and the Variable Statement panel, he notices that the income from operations is higher on the absorption cost income statement. He is considering manufacturing another 10,000 units, up to the company’s capacity for manufacturing, in the coming year. He reasons that this will boost income from operations and satisfy the company’s owner that the company is sufficiently profitable. Although the total units manufactured changes, assume that total fixed costs, unit variable costs, unit sales price, and the sales levels are the same. Complete questions (1)-(4) that follow. If the answer is zero, enter "0". 1. Use the income statements on the Absorption Statement and Variable Statement panels to complete the following table for the original production level. Then prepare similar income statements at a production level 10,000 units higher and add that information to the table. Assume that total fixed costs, unit variable costs, unit sales price, and the sales levels are the same at both production levels. Income From Operations Original Original Additional Additional Production Production 10,000 10,000 Level-Absorption Level-Variable Units-Absorption Units-Variable 2. What is the change in income from operations from producing 10,000 additional units under absorption costing? 3. What is the change in income from operations from producing 10,000 additional units under variable costing?

Saxon, Inc. Absorption Costing Income Statement For the Year Ended December 31 1 Sales $1,125,000.00 2 Cost of goods sold: 3 Beginning inventory $0.00 4 Cost of goods manufactured 840,000.00 5 Ending inventory (210,000.00) 6 Total cost of goods sold 630,000.00 7 Gross profit $495,000.00 8 Selling and administrative expenses 275,000.00 9 Income from operations $220,000.00 Saxon, Inc. Variable Costing Income Statement For the Year Ended December 31 1 Sales $1,125,000.00 2 Variable cost of goods sold: 3 Beginning inventory $0.00 4 Variable cost of goods manufactured 600,000.00 5 Ending inventory (150,000.00) 6 Total variable cost of goods sold 450,000.00 7 Manufacturing margin $675,000.00 8 Variable selling and administrative expenses 210,000.00 9 Contribution margin $465,000.00 10 Fixed costs: 11 Fixed manufacturing costs $240,000.00 12 Fixed selling and administrative expenses 65,000.00 13 Total fixed costs 305,000.00 14 Income from operations $160,000.00 For planning and control purposes, managers often compare planned and actual contribution margin. Variable costing is used as a basis for such analyses. Examine the following contribution margin data, and then complete the Contribution Margin Analysis panel. Saxon, Inc. Contribution Margin Data Schedule Actual Planned Sales $1,125,000 $1,190,000 Variable cost of goods sold $450,000 $462,000 Variable selling and administrative expenses 210,000 154,000 Total $660,000 $616,000 Contribution margin $465,000 $574,000 Number of units sold 15,000 14,000 Per unit: Sales price $75.00 $85.00 Variable cost of goods sold 30.00 33.00 Variable selling and administrative expenses 14.00 11.00 The production manager for Saxon, Inc. is worried because the company is not showing a high enough profit. Looking at the income statements on the Absorption Statement panel and the Variable Statement panel, he notices that the income from operations is higher on the absorption cost income statement. He is considering manufacturing another 10,000 units, up to the company’s capacity for manufacturing, in the coming year. He reasons that this will boost income from operations and satisfy the company’s owner that the company is sufficiently profitable. Although the total units manufactured changes, assume that total fixed costs, unit variable costs, unit sales price, and the sales levels are the same. Complete questions (1)-(4) that follow. If the answer is zero, enter "0". 1. Use the income statements on the Absorption Statement and Variable Statement panels to complete the following table for the original production level. Then prepare similar income statements at a production level 10,000 units higher and add that information to the table. Assume that total fixed costs, unit variable costs, unit sales price, and the sales levels are the same at both production levels. Income From Operations Original Original Additional Additional Production Production 10,000 10,000 Level-Absorption Level-Variable Units-Absorption Units-Variable 2. What is the change in income from operations from producing 10,000 additional units under absorption costing? 3. What is the change in income from operations from producing 10,000 additional units under variable costing?

Financial Accounting: The Impact on Decision Makers

10th Edition

ISBN:9781305654174

Author:Gary A. Porter, Curtis L. Norton

Publisher:Gary A. Porter, Curtis L. Norton

Chapter5: Inventories And Cost Of Goods Sold

Section: Chapter Questions

Problem 5.12MCP

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Question

Saxon, Inc.

Absorption Costing Income Statement

For the Year Ended December 31

1	Sales		$1,125,000.00
2	Cost of goods sold:
3	Beginning inventory	$0.00
4	Cost of goods manufactured	840,000.00
5	Ending inventory	(210,000.00)
6	Total cost of goods sold		630,000.00
7	Gross profit		$495,000.00
8	Selling and administrative expenses		275,000.00
9	Income from operations		$220,000.00

Saxon, Inc.

Variable Costing Income Statement

For the Year Ended December 31

1	Sales		$1,125,000.00
2	Variable cost of goods sold:
3	Beginning inventory	$0.00
4	Variable cost of goods manufactured	600,000.00
5	Ending inventory	(150,000.00)
6	Total variable cost of goods sold		450,000.00
7	Manufacturing margin		$675,000.00
8	Variable selling and administrative expenses		210,000.00
9	Contribution margin		$465,000.00
10	Fixed costs:
11	Fixed manufacturing costs	$240,000.00
12	Fixed selling and administrative expenses	65,000.00
13	Total fixed costs		305,000.00
14	Income from operations		$160,000.00

For planning and control purposes, managers often compare planned and actual contribution margin. Variable costing is used as a basis for such analyses.

Examine the following contribution margin data, and then complete the Contribution Margin Analysis panel.

Saxon, Inc.
Contribution Margin Data Schedule
	Actual	Planned
Sales	$1,125,000	$1,190,000
Variable cost of goods sold	$450,000	$462,000
Variable selling and administrative expenses	210,000	154,000
Total	$660,000	$616,000
Contribution margin	$465,000	$574,000
Number of units sold	15,000	14,000
Per unit:
Sales price	$75.00	$85.00
Variable cost of goods sold	30.00	33.00
Variable selling and administrative expenses	14.00	11.00

The production manager for Saxon, Inc. is worried because the company is not showing a high enough profit. Looking at the income statements on the Absorption Statement panel and the Variable Statement panel, he notices that the income from operations is higher on the absorption cost income statement. He is considering manufacturing another 10,000 units, up to the company’s capacity for manufacturing, in the coming year. He reasons that this will boost income from operations and satisfy the company’s owner that the company is sufficiently profitable. Although the total units manufactured changes, assume that total fixed costs, unit variable costs, unit sales price, and the sales levels are the same. Complete questions (1)-(4) that follow. If the answer is zero, enter "0".

1. Use the income statements on the Absorption Statement and Variable Statement panels to complete the following table for the original production level. Then prepare similar income statements at a production level 10,000 units higher and add that information to the table. Assume that total fixed costs, unit variable costs, unit sales price, and the sales levels are the same at both production levels.

Income From Operations
Original	Original	Additional	Additional
Production	Production	10,000	10,000
Level-Absorption	Level-Variable	Units-Absorption	Units-Variable

2. What is the change in income from operations from producing 10,000 additional units under absorption costing?

3. What is the change in income from operations from producing 10,000 additional units under variable costing?

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