Question

Prepare January and February income statements using variable costing.

Answer 1

To prepare January and February income statements using variable costing, determine the cost structure of the firm, calculate costs using given formulas, and create a table showing relevant cost data.

Step-by-step explanation:

In order to prepare January and February income statements using variable costing, follow the steps below:

1. Determine the cost structure of the firm by calculating total fixed costs and variable costs.
2. Calculate total cost, average variable cost, average total cost, and marginal cost using the formulas given in the Production, Costs, and Industry Structure chapter (Table 8.8).
3. Create a table that shows the company's output, total cost, marginal cost, average cost, variable cost, and average variable cost.

Average variable costs are typically U-shaped and if a firm's average variable cost of production is lower than the market price, the firm would be earning profits.