Response to the following problem:
Chenango Can Company manufactures metal cans used in the food -processing industry. A case of cans sells for $25. The variable costs of production for one case of cans are as follows:
DIRECT MATERIAL 7.50
DIRECT LABOR 2.50
VARIABLE MANUFACTURING OVERHEAD 6.00
Total variable manufacturing cost per case 16.00
Variable selling and administrative costs amount to $.50 per case.
Fixed manufacturing costs are $400,000 per year and fixed selling and administrative cost is $37,500 per year. A unit is one case of cans.
YEAR 1 YEAR 2 YEAR 3
FINISHED GOODS INVENTORY IN UNITS, JANUARY 1 0 0 20,000
ACTUAL PRODUCTION IN UNITS 80,000 80,000 80,000
SALES IN UNITS 80,000 60,000 90,000
FINISHED GOODS INVENTORY IN UNITS, DECEMBER 31 0 20,000 10,000
Prepare operating income statements for the first three years of operations using both absorption and variable costing. Reconcile operating income reported under absorption and variable costing for each of its three years of operation. Assume during the fourth year of operations the company ends the year with no inventory on hand.
What will be the difference between absorption costing income and variable costing income in year 4.
What will be the relationship between total operating income for the four-year period as reported under absorption and variable costing?