Fournier Company Had the Following Operating Data for Its First

question 111

Essay

Fournier Company had the following operating data for its first two years of operations:
Variable cost per unit:
Direct materials $4
Direct labour $5
Variable overhead $3
Fixed costs per year:
Overhead $120,000
Selling and administrative $20,000
Fournier produced 20,000 units in the first year and sold 15,000. In the second year, it produced 15,000 units and sold 20,000 units. The selling price per unit each year was $21. Fournier uses actual costing.
a)Prepare income statements for both years using absorption costing. Has firm performance, as measured by income, improved or declined from Year 1 to Year 2?
b)Prepare income statements for both years using variable costing. Based on variable costing income, has firm performance improved or declined from Year 1 to Year 2?
c)Briefly explain why variable costing measures managers' performance more accurately than absorption costing.

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Definitions:

Long-term

Refers to holding investments or assets for a duration typically exceeding one year.

Capital Structure

The composition of a firm's financing through a combination of debt and equity.

Funds

Financial resources that are set aside for a specific purpose or investment, including both publicly traded funds and private investments.