Explain the possibility to increase net income by simply producing more goods under absorption costing.

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Repsola is a drilling company that operates an offshore Oilfield in Feeland. Five yearsago, Feeland had a major oil discovery and granted licenses to drill oil to reputable,experienced drilling companies. The licensing agreement requires the company toremove the oil rig at the end of production and restore the seabed. Ninety percent ofthe eventual costs of undertaking the work relate to the removal of the oil rig andrestoration of damage caused by building it and ten percent arise through theextraction of the oil. At the Statement of Financial Position (SOFP) date (December 312025), the rig has been constructed but no oil has been extractedOn January 1st 2023, Repsola obtained the license to construct an oil rig at a cost of$500 million. Two years later the oil rig was completed. The rig is expected to beremoved in 20 years from the date of acquisition. The estimated eventual cost is 100million. The company’s cost of capital is 10% and its year end is December 31st. Repsolauses…

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Chapter 10, Problem 5Q

To determine

Explain the possibility to increase net income by simply producing more goods under absorption costing.

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Repsola is a drilling company that operates an offshore Oilfield in Feeland. Five yearsago, Feeland had a major oil discovery and granted licenses to drill oil to reputable,experienced drilling companies. The licensing agreement requires the company toremove the oil rig at the end of production and restore the seabed. Ninety percent ofthe eventual costs of undertaking the work relate to the removal of the oil rig andrestoration of damage caused by building it and ten percent arise through theextraction of the oil. At the Statement of Financial Position (SOFP) date (December 312025), the rig has been constructed but no oil has been extractedOn January 1st 2023, Repsola obtained the license to construct an oil rig at a cost of$500 million. Two years later the oil rig was completed. The rig is expected to beremoved in 20 years from the date of acquisition. The estimated eventual cost is 100million. The company’s cost of capital is 10% and its year end is December 31st. Repsolauses…

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