Marigold 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 $32 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 2017
Beginning inventory 0
Expected sales in units 60,000
Selling price per unit $33
Variable manufacturing costs per unit $13
Fixed manufacturing overhead costs (total) $540,000
Fixed manufacturing overhead costs per unit:
Based on 60,000 units $9 per unit ($540,000 + 60,000)
Based on 90,000 units $6 per unit ($540,00090,000)
Manufacturing cost per unit:
Based on 60,000 units $22 per unit ($13 variable + $9 fixed)
Based on 90,000 units $19 per unit ($13 variable + $6 fixed)
Variable selling and administrative expenses $5
Fixed selling and administrative
expenses (total) $50,000
(1) 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.
(2) 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.

Marigold Batteries

A Division of Enterprise Corporation

1) Income Statement, absorption costing:

                                           60,000 Units  90,000 Units

Sales revenue                     $1,980,000     $2,970,000

Manufacturing costs:

Variable manufacturing costs 780,000        1,170,000

Fixed manufacturing costs     540,000         540,000

Total manufacturing costs $1,320,000      $1,710,000

Gross profit                           $660,000    $1,260,000

Expenses:

Variable selling and admin    300,000         450,000

Fixed selling and admin          50,000            50,000

Total expenses                    $350,000       $500,000

Net income                           $310,000       $760,000

2) Income Statement, variable costing:

                                           60,000 Units  90,000 Units

Sales revenue                     $1,980,000     $2,970,000

Variable costs:

Variable manufacturing costs 780,000         1,170,000

Variable selling and admin     300,000          450,000

Total variable costs            $1,080,000     $1,620,000

Contribution margin            $900,000      $1,350,000

Fixed costs:

Fixed manufacturing costs    540,000         540,000

Fixed selling and admin          50,000            50,000

Total fixed costs                  $590,000       $590,000

Net income                           $310,000       $760,000

Explanation:

a) Data and Calculations:

Selling price per unit = $32

Expected unit sales             60,000         90,000

Production units                  60,000         90,000

Beginning inventory  = 0

Selling price per unit = $33

Variable manufacturing costs = $13 per unit

Fixed manufacturing costs = $540,000

Variable selling and administrative expenses = $5

Fixed selling and administrative expenses = $50,000

b) The key difference lies with the treatment of fixed and variable costs.  With absorption costing, the fixed manufacturing costs are included in the costs of products.  With variable costing, they are treated as period costs or expenses.  Also, with variable costing, variable selling and administrative costs are included in the variable costs of the products.  The variable costing method calculates the contribution margin before deducting the fixed expenses to arrive at the net income.  On the other hand, the absorption costing method calculates the gross profit instead of the contribution margin.

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