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Chapter 2

# COMMERCE 2AB3 Chapter Notes - Chapter 2: Earnings Before Interest And Taxes, Total Absorption Costing

Department
Commerce
Course Code
COMMERCE 2AB3
Professor
Mohamed Shehata
Chapter
2

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Question 1
Tudor Inc. was concerned that increased sales did not result in increased profits for 2015. Both
variable unit and total fixed manufacturing costs for 2014 and 2015 remained constant at \$20 and
\$2,000,000, respectively.
In 2014 the company produced 100,000 units and sold 80,000 units at a price of \$50 per unit.
There was no beginning inventory in 2014. In 2015 the company made 70,000 units and sold
90,000 units at a price of \$50. Selling and administrative expenses were all fixed at \$100,000
each year.
Required:
a. Prepare income statements for each year using absorption costing.
b. Prepare income statements for each year using variable costing.
c. Explain why the income was different each year using the two methods. Show computations.
Absorption costing 2014 2015
Sales Revenue 4,000,000 4,500,000
COGS
3,200,000
4,200,000
Gross Margin
_________________
800,000 300,000
100,000 100,000
Variable Costing
2014
2015
Sales Revenue
4,000,000
4,500,000
Total Variable Costs
1,600,000
1,800,000
__________________ ______________________
Gross Margin
2,400,000
2,700,000
Fixed SaA
100,000
100,000
Fixed MoH
2,000,000
2,000,000
300k
600k
700k
200k