Barnes & Coffman Industries makes artificial Christmas trees. The unit costs for producing a tree are:
Direct materials . . . . . . . . . . . . . $30
Direct labor . . . . . . . . . . . . . $12
Variable overhead . . . . . . . . . . . . . $15
Fixed overhead . . . . . . . . . . . . . $ 7
The company also incurs $4 per tree in variable selling and administrative costs and $20,000 in fixed marketing costs.
At the beginning of the year the company had 800 trees in the beginning Finished Goods Inventory. The company produced 5,000 trees during the year. Sales totaled 4,200 trees at a price of $100 per tree.
Required
a. Based on absorption costing, what was the company’s operating income for the year?
b. Based on variable costing, what was the company’s operating income for the year?
c. Assume that in the following year the company produced 5,000 trees and sold 5,200. Based on absorption costing, what was the operating income for that year? Based on variable costing, what was the operating income for that year?
d. For both years, explain why the operating income based on absorption costing differed from the operating income based on variable costing.
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