Raul Technologies Is Concerned That Increased Sales Did Not Result

question 173

Essay

Raul Technologies is concerned that increased sales did not result in increased profits for 2016.Both variable unit and total fixed manufacturing costs for 2015 and 2016 remained constant at $35 and $3,500,000,respectively.
In 2015,the company produced 100,000 units and sold 80,000 units at a price of $87.50 per unit.There was no beginning inventory in 2015.In 2016,the company made 70,000 units and sold 90,000 units at a price of $87.50.Selling and administrative expenses were all fixed at $350,000 each year.
Required:
a.Prepare income statements for each year using absorption costing.
b.Prepare income statements for each year using variable costing.
c.Explain why the income was different each year using the two methods.Show computations.

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Definitions:

Net Income

The total profit or loss of a company after all revenues, costs, and expenses have been accounted for, often referred to as the bottom line.

Operating Loss

A financial condition where a company's total operating expenses exceed its total revenues, indicating a negative operating profit.

Income Summary

An account in the ledger that aggregates all income and expense accounts to determine the net income or loss for a period.

Prepaid Rent

This is the amount paid for rent in advance of the rental period to which it relates, recorded as an asset on the balance sheet until the period to which it applies.