Reference no: EM132908643

Question - McCartney Pumps is a division of UK Controls Corporation. The division manufactures and sells a pump used in a wide variety of applications. During the coming year it expects to sell 25,000 units for $17 per unit. George Harrison manages the division. He is considering producing either 25,000 or 35,000 units during the period. Other information is presented in the schedule.

Division Information - 2020

Beginning Inventory 0

Expected sales in units 25,000

Selling price per unit $17.00

Variable manufacturing cost per unit $6.00

Fixed manufacturing overhead cost (total) $140,000

Fixed manufacturing overhead costs per unit Based on 25,000 units $5.60 per unit ($140,000 ÷ 25,000)

Based on 35,000 units $4.00 per unit ($140,000 ÷ 35,000)

Manufacturing cost per unit Based on 25,000 units $11.60 per unit ($6.00 variable + $5.60 fixed)

Based on 35,000 units $10.00 per unit ($6.00 variable + $4.00 fixed)

Selling and administrative expense (all fixed) $37,000

Instructions -

a) Prepare an absorption-costing income statement with one column showing the results if 25,000 units are produced, and one column showing the results if 35,000 units are produced.

b) Why is income different for the two production levels, when sales are 25,000 units either way?