LLAP Company manufactures a specialized hoverboard. LLAP began 2017 with an inventory of 240 hoverboards. During the year, it produced 1,200 boards and sold 1,300 for $800 each. Fixed production costs were $319,000, and variable production costs were $375 per unit. Fixed advertising, marketing, and other general and administrative expenses were $150,000, and variable shipping costs were $20 per board. Assume that the cost of each unit in beginning inventory is equal to 2017 inventory cost.

Required

1. Prepare an income statement assuming LLAP uses variable costing.

2. Prepare an income statement assuming LLAP uses absorption costing. LLAP uses a denominator level of 1,100 units. Production-volume variances are written off to cost of goods sold.

3. Compute the breakeven point in units sold assuming LLAP uses the following:

a. Variable costing

b. Absorption costing (Production = 1,200 boards)

4. Provide proof of your preceding breakeven calculations.

5. Assume that $44,000 of fixed administrative costs were reclassified as fixed production costs. Would this reclassification affect the breakeven point using variable costing? What if absorption costing were used? Explain.

6. The company that supplies LLAP with its specialized impact-resistant material has announced a price increase of $20 for each board. What effect would this have on the breakeven points previously calculated in requirement 3?

Part 1 : Income statement assuming LLAP uses variable costing

                                                                                                 $

Sales ($800×1300)                                                                1040000

Less Cost of Goods Sold

Opening Stock ($375 × 240)                        90000

Add Cost of Goods Manufactured             450000

Less Closing Stock ($375×140)                   (52500)            (487500)      

Gross Profit                                                                             552500

Less Periodic Costs

Fixed Production Costs                                                        ( 319000)

Fixed Advertising, Marketing, Admin                                   (150000)

Shipping Cost( $ 20 × 1300)                                                   (26000)

Net Income                                                                               57500

Part 2 : Income statement assuming LLAP uses absorption costing

                                                                                                 $

Sales ($800×1300)                                                                1040000

Less Cost of Goods Sold

Opening Stock ($665 × 240)                       159600

Add Cost of Goods Manufactured             769000

Less Closing Stock ($665×140)                   (93100)  

Add Under - Applied Overheads                 29000             864500                                                                                                        

Gross Profit                                                                             175500

Less Periodic Costs

Fixed Advertising, Marketing, Admin                                   (150000)

Shipping Cost( $ 20 × 1300)                                                   (26000)

Net Loss                                                                                     (500)

Part 3 and Part 4 : Breakeven point in units sold assuming LLAP uses:

   a. Variable costing

B.E.P (Units) = Fixed Costs/Contribution per unit

                    =($319000+$150000)/($800-$375-$20)

                    =$469000/$405

                    =1159

   b. Absorption costing (Production = 1,200 boards)

B.E.P (Units) = Fixed Costs/Contribution per unit

                    =($319000+$150000)/($800-$375-$20)

                    =$469000/$405

                    =1159

Part 5 : Effect of Re-classification of $44,000 of fixed administrative costs as fixed production costs on:

     a. Breakeven point using variable costing

There is no effect. The $44000 is still a fixed overhead for Break-even calculation

     b.Breakeven point using Absorption costing

There is no effect. The $44000 is still a fixed overhead for Break-even calculation

Part 6 : Effect of a price increase of $20 for each board on Breakeven point in units sold assuming LLAP uses:

   a. Variable costing

B.E.P (Units) = Fixed Costs/Contribution per unit

                    =($319000+$150000)/($800-$375-$20-20)

                    =$469000/$385

                    =1219

Therefore this  increases the Break Even Point by 60 units

   b. Absorption costing (Production = 1,200 boards)

B.E.P (Units) = Fixed Costs/Contribution per unit

                    =($319000+$150000)/($800-$375-$20-20)

                    =$469000/$385

                    =1219

Therefore this  increases the Break Even Point by 60 units

Explanation:

Part 1

Variable Costing System assumes that all Fixed Manufacturing costs are periodic costs. Thus Fixed Manufacturing costs are not used for product valuation but only for Profit calculation.

Part 2

Absorption Costing System assumes that all Fixed Manufacturing costs are product costs. Thus Fixed Manufacturing costs are used for product valuation as well as for Profit calculation.

Part 3

For Break Even purposes Variable Costing and Absorption Costing will produce the same results.

Part 5

The $ 44000 fixed administrative cost  reclassified as fixed production cost is still a Fixed Overhead for Break-even point Calculation purposes.

Part 6

The $20 charge further increases variable cost per unit. This lowers the contribution per unit and increases the Break Even Point.

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