Bird’s Eye View Case Study

Bird’s Eye View Case Study

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Bird’s Eye View manufactures satellite dishes used in residential and commercial installations for satellite-broadcasted television. For each unit, the following costs apply: $50 for direct material, $100 for direct labor, and $60 for variable overhead. The company’s annual fixed overhead cost is $450,000; it uses expected capacity of 7,500 units produced as the basis for applying fixed overhead to products. A commission of 10 percent of the selling price is paid on each unit sold. Annual fixed selling and administrative expenses are $108,000. The following additional information is available:

Year 1        Year 2

Selling price per unit            $500        $500

Number of units sold             6,000     7,200

Number of units produced 7,500       6,600

Beginning inventory (units) 4,500    6,000

Ending inventory (units)  6,000         ?

Prepare pre-tax income statements under absorption and variable costing for Year 1 and Year 2, with any volume variance being charged to Cost of Goods Sold.

Prepare pre-tax income statements under variable costing for Year 1 and Year 2, with any volume variance being charged to Cost of Goods Sold.

Reconcile the differences in income for the two methods.

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