Bianca Bicycle Company manufactures mountain bikes with a variable cost of $200. The bicycles sell for $300 each. Budgeted fixed manufacturing overhead for the most recent year was $2,310,000. Planned and actual production for the year were the same. Required: Under each of the following conditions, state (a) whether income is higher under variable or absorption costing and (b) the amount of the difference in reported income under the two methods. Treat each condition as an independent case.
1. Production 20,000 units
Sales 23,000 units
2. Production 10,000 units
Sales 10,000 units
3. Production 11,000 units
Sales 9.000 units

1. Income is higher under variable costing, and amount of difference is $330,000

2. Income is same under both methods and amount of difference is zero.

3. Income is higher under absorption costing and amount of difference is $412,000

Explanation:

1. Variable costing method:

Sales $300 * 23,000 units = $6,900,000

Cost of sales:

Variable cost $200 * 23,000 units = $4,600,000

Profit $2,300,000

Breakeven point = Fixed cost / Contribution margin

Breakeven point : $2,310,000 / $100 = 23,100 units

Fixed cost [$2,310,000 / 20,000] * 23,000 = $2,656,500

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