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:

State Sales Tax

A tax imposed by a state on sales of goods and services, typically calculated as a percentage of the sale price.

Selling Price

The amount of money charged for a product or service, ultimately determining the revenue generated from sales.

Net 45

A payment term indicating that the full amount is due for payment 45 days after the invoice date.

Sales Discount

A reduction in the price of a product or service offered to customers to encourage prompt payment.