Reference no: EM131785004

Variable vs. Absorption costing

In 2014 (last year), the Plant Company produced 50,000 units (the normal volume) and sold 46,000. The following sales and cost information relates to 2014:

sales price................ $20.00/ unit

unit costs:

direct material........... $4.00

direct labor.............. $3.00

variable factory overhead. $2.50

fixed factory overhead.... . $1.50 (based on normal production)

variable selling expenses. $2.50

In addition to the above costs, Plant had total fixed administrative expenses in 2014 of $200,000.

In the current year (2015), Plant experienced the same selling prices (and costs) as it did in 2014. 2015 production was equal to 49,000 units. 2015 sales totaled 48,000 units.

REQUIRED FOR 2015 (THE CURRENT YEAR)

1. Prepare an income statement under the variable costing format for year 2015.

2. Prepare an income statement under the absorption costing format for 2015.

3. Determine Plant's breakeven level of sales under the variable costing format (in units).

4. Reconcile the difference in income in requirements 1 and 2.