Exercise 5-17
Required
What is net income using variable costing?
Sales 1,350,000$
Exercise 5-18
Required
How much fixed manufacturing overhead is in ending inventory under full costing?
2017 2018 2019 Total
Units sold 20,000 20,000 20,000 60,000
Units produced 20,000 25,000 15,000 60,000
Fixed production costs $750,000 $750,000 $750,000
Variable production costs per unit 150 150 150
Selling price per unit 250 250 250
Fixed selling and administrative expense 220,000 220,000 220,000
Required
a. Calculate profit and the value of ending inventory for each year using full costing.
2017 2018 2019
Full cost per unit
Net income
c. Calculate profit and the value of ending inventory for each year using variable costing.
2017 2018 2019
Spencer Electronics produces a wireless home lighting device that allows consumers to turn on home
lights from their cars and light a safe path into and through their homes. Information on the first three
years of business is as follows:
Problem 5-1 Variable and Full Costing: Sales Constant but Production Fluctuates
b. Explain why profit fluctuates from year to year even though the number of units sold, the selling
price, and the cost structure remain constant.
Net income
d. Explain why, using variable costing, profit does not fluctuate from year to year.
What-if?
Consider the following after you have completed the requirements of P5-1.
Full cost per unit
Original bonus
Bonus with increased production
Increase in bonus
Suppose the manager of Spencer Electronics is paid a bonus based on 10% of gross margin for
the period. Determine the effect that increasing production in 2017 to 23,000 units will have on his
bonus for 2017 assuming sales and costs remain as given. If the manager receiving the bonus
initiated the increase in production, is this considered ethical? Explain.
Problem data follow:
2017 2018 2019 Total
Units sold 20,000 20,000 20,000 60,000
Units produced 20,000 25,000 15,000 60,000
Fixed production costs $750,000 $750,000 $750,000
Variable production costs per unit 150 150 150
Selling price per unit 250 250 250
Fixed selling and administrative expense 220,000 220,000 220,000
Required
a. Calculate profit and the value of ending inventory for each year using full costing.
2017 2018 2019
750,000$ 750,000$ 750,000$
Solution: Problem 5-1 Variable and Full Costing: Sales Constant but Production
Fluctuates
Fixed production costs
Number of units
Fixed production cost per unit
Number of units
Cost per unit
Variable production costs per unit
Cost of goods sold
Gross margin
Selling and administrative expense
c. Calculate profit and the value of ending inventory for each year using variable costing.
2017 2018 2019
5,000,000$ 5,000,000$ 5,000,000$
d. Explain why, using variable costing, profit does not fluctuate from year to year.
What-if?
Sales
2017 2018 2019 Total
Units sold 5,000 5,000 5,000 15,000
Units produced 5,000 6,000 4,000 15,000
Fixed production costs $50,000 $50,000 $50,000
Variable production costs per unit 75 75 75
Selling price per unit 225 225 225
Fixed selling and administrative expense 5,000 5,000 5,000
Required
a. Calculate profit and the value of ending inventory for each year using full costing.
2017 2018 2019
Full cost per unit
Net income
c. Calculate profit and the value of ending inventory for each year using variable costing.
Hamilton Stage Supplies is a manufacturer of a specialized type of light used in theaters. Information
on the first three years of business is as follows:
Problem 5-2 Variable and Full Costing: Sales and Production Fluctuate
b. Explain why profit fluctuates from year to year even though the number of units sold, the selling
price, and the cost structure remain constant.
Value of ending inventory
Net income
d. Explain why, using variable costing, profit does not fluctuate from year to year.
Value of ending inventory
Problem data follow:
2017 2018 2019 Total
Units sold 5,000 5,000 5,000 15,000
Units produced 5,000 6,000 4,000 15,000
Fixed production costs $50,000 $50,000 $50,000
Variable production costs per unit 75 75 75
Selling price per unit 225 225 225
Fixed selling and administrative expense 5,000 5,000 5,000
Required
a. Calculate profit and the value of ending inventory for each year using full costing.
2017 2018 2019
50,000$ 50,000$ 50,000$
Solution: Problem 5-2 Variable and Full Costing: Sales and Production Fluctuate
Fixed production costs
Number of units
Fixed production cost per unit
Variable production costs per unit
*Cost of goods sold
*Gross margin
Selling and administrative expense
Number of units
*Cost per unit
c. Calculate profit and the value of ending inventory for each year using variable costing.
1,125,000$ 1,125,000$ 1,125,000$
d. Explain why, using variable costing, profit does not fluctuate from year to year.
b. Explain why profit fluctuates from year to year even though the number of units sold, the selling
price, and the cost structure remain constant.
In 2018, the company produced more units than it sold. As a result, the fixed manufacturing
Sales