Chapter 8, Problem 36P

Dayton Lighting Company had operating income for the first 10 months of the current year of $200,000. One hundred thousand units were manufactured during this period (the same as the planned production), and 100,000 units were sold. Fixed manufacturing overhead was $2,000,000 over the 10-month period (i.e., $200,000 per month). There are no selling and administrative expenses for Dayton Lighting Company. Both variable and fixed costs are expected to continue at the same rates for the balance of the year (i.e., fixed costs at $200,000 per month and variable costs at the same variable cost per unit). There were 10,000 units in inventory on October 31. Twenty thousand units are to be produced and 19,000 units are to be sold in total over the last two months of the current year. Assume the unit variable cost is the same in the current year as in the previous year. (Hint: You cannot calculate revenue or cost of goods sold; you must work directly with contribution margin or gross margin.)

Required:

1. 1. If operations proceed as described, will operating income be higher under variable or absorption costing for the current year in total? Why?
2. 2. If operations proceed as described, what will operating income for the year in total be under (a) variable costing and (b) absorption costing?
3. 3. Discuss the advantages and disadvantages of absorption and variable costing.