Roland Company operates a small factory in which it manufactures two products: A and B. Production and sales result for last year were as follow:
Units sold 8,000 16,000
Selling price per unit 65 52
Variable costs per unit 35 30
Fixed costs per unit 15 15
For purposes of simplicity, the firm allocates total fixed costs over the total number of units of A and B produced and sold.
The research department has developed a new product (C) as a replacement for product B. Market studies show that Roland Company could sell 11,000 units of C next year at a price of $80, the variable costs per unit of C are $39. The introduction of product C will lead to a 10% increase in demand for product A and discontinuation of product B. If the company does not introduce the new product, it expects next year’s result to be the same as last year’s.
Should Roland Company introduce product C next year? Explain why or why not. Show calculations to support your decision.
Cutting Edge Corp. produces sporting equipment. In 2012, the first year of operations, Cutting Edge produced 25,000 units and sold 20,000 units. In 2013, the production and sales results were exactly reversed. In each year, selling price was $100, variable manufacturing costs were $40 per unit, variable selling expenses were $8 per unit, fixed manufacturing costs were $540,000, and fixed administrative expenses were $200,000.
(a) Compute the net income under variable costing for each year.
(b) Compute the net income under absorption costing for each year.
(c) Reconcile the differences each year in income from operations under the two costing approaches.
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