Guymon Manufacturing makes and sells a single product The company\'s manufacturi

Question

Guymon Manufacturing makes and sells a single product The company's manufacturing process is highly developed and the manufacturing costs are stable through time. Each unit requires $100 in variable manufacturing costs per unit. Also, $450,000 in factory fixed costs are paid for each year. Other costs are listed in the absorption-method income statement below for 2010 Please note that in 2010, Guymon sold 20,000 units, but only manufactured 18,000 units to reduce its inventory holdings. Income Statement for Year Ending on December 31, 2010 Suppose Guymon is considering using the variable costing method (eg .contribution margin income statement) for internal reporting purposes What is the pre-tax reported income under this method for 2010? Suppose Guymon is considering using the variable costing method (e.g., contribution margin income statement) for internal reporting purposes. What is the pre-tax reported income under this method for 2010? What causes the differences in reported pre-tax income (if any)? Reconcile the absorption income statement and your reported result in Part A In 2011, Guymon plans on making two operational changes. First, Guymon plans on raising the selling price per unit to $210. Second, fixed selling and administrative costs will increase to $750,000. Given these changes, how many units will Guymon need to make and sell to achieve a pre-tax income equal to last year (e g., $500,000)? Assume units produced equals units sold. Guymon's executive team will receive a large bonus if the reported pre-tax income in 2011 (as reported in an absorption-method income statement) increases from the previous year. Thus, the executives will receive their bonuses if pre-tax reported income is greater than $500,000. With the operational changes described above (c), the executive team only expects to be able to sell 18,000 units next year. Given this level of sales, how may units, at minimum, must Guymon produce for the executives to receive their bonuses in 2011?

Explanation / Answer

a)

Using variable costing method (Contribution margin Income statement)

a)

Using variable costing method (Contribution margin Income statement)

for the year ending on December 31,2010 Sales revenue $4,000,000 Variable expenses (20,000 * $100) 2,000,000 Contribution margin 2,000,000 Fixed expenses (Factory) 450,000 Fixed selling & Administrative costs 600,000 Total fixed expenses 1,050,000 Pre-tax reported income 950,000

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