Question

Thornton Manufacturing pays its production managers a bonus based on the company's profitability. During the two most recent years, the company maintained the same cost structure to manufacture its products.

Units Produced
Year Production and Sales Year 2 Year 3
Cost Data
Direct materials 13. 90 per unit
Direct labor 11.10 per unit
Manufacturing overhead-variable 97,20097,20097,200
Manufacturing overhead-fixed 8.50 per unit sold
Variable selling and administrative expenses 58,000
Fixed selling and administrative expenses

Units Sold
4,000 6,000
4,000 4,000

(Assume that selling and administrative expenses are associated with goods sold.)
Thornton sells its products for $108.60 per unit.

Required
a. Prepare income statements based on absorption costing for Year 2 and Year 3.

Answer 1

The income statements for Thornton Manufacturing based on absorption costing require calculating the cost of goods sold for both Year 2 and Year 3 and then subtracting total costs from total revenues. Year 2 involves 4,000 units, while Year 3 involves 6,000 units. Direct materials, direct labor, manufacturing overhead, and selling and administrative expenses are used in these calculations.

Step-by-step explanation:

To prepare the income statements for Year 2 and Year 3 based on absorption costing, we must calculate the cost of goods sold (COGS), gross profit, and net income for both years. The key components needed to calculate the COGS include the direct materials, direct labor, and both variable and fixed manufacturing overheads. To calculate the net income, we must also account for variable and fixed selling and administrative expenses.

For Year 2, the COGS is (13.90 + 11.10 + 8.50) * 4,000 units = 134,000; the variable manufacturing overhead is 97,200, and the variable selling and administrative expenses are 58,000. Total revenues are 108.60 * 4,000 = 434,400. The net income can then be calculated by subtracting the total costs from the total revenues.

For Year 3, since the units sold are 6,000, we use the same per-unit costs and the total variable costs but change the quantities sold. The fixed selling and administrative expenses remain unchanged. Total revenues are 108.60 * 6,000 = 651,600. By calculating and subtracting the total costs as we did for Year 2, we can determine the net income for Year 3.