swisher, incorporated reports the following annual cost data for its single product:\nnormal production…

swisher, incorporated reports the following annual cost data for its single product:\nnormal production level 30,000 units\ndirect materials $ 6.40 per unit\ndirect labor $ 3.93 per unit\nvariable overhead $ 5.89 per unit\nfixed overhead $ 150,000 in total\nthis product is normally sold for $ 48 per unit. if swisher increases its production to 50,000 units, while sales remain at the current 30,000 - unit level, by how much would the companys income increase or decrease under variable costing?\nmultiple choice\n$ 50,000 decrease\n$ 90,000 decrease\nthere is no change in income.\n$ 90,000 increase\n$ 50,000 increase

swisher, incorporated reports the following annual cost data for its single product:\nnormal production level 30,000 units\ndirect materials $ 6.40 per unit\ndirect labor $ 3.93 per unit\nvariable overhead $ 5.89 per unit\nfixed overhead $ 150,000 in total\nthis product is normally sold for $ 48 per unit. if swisher increases its production to 50,000 units, while sales remain at the current 30,000 - unit level, by how much would the companys income increase or decrease under variable costing?\nmultiple choice\n$ 50,000 decrease\n$ 90,000 decrease\nthere is no change in income.\n$ 90,000 increase\n$ 50,000 increase

Answer

Explanation:

Step1: Calculate the original fixed overhead per unit

Original production level (n_1 = 30000) units, fixed overhead (F = 150000). Original fixed overhead per unit (=\frac{F}{n_1}=\frac{150000}{30000}=5) dollars per unit.

Step2: Calculate the new fixed overhead per unit

New production level (n_2 = 50000) units. New fixed overhead per unit (=\frac{F}{n_2}=\frac{150000}{50000}=3) dollars per unit.

Step3: Calculate the change in cost per unit

Change in fixed overhead per unit (=5 - 3=2) dollars per unit.

Step4: Calculate the change in income

Since sales remain the same, the change in income is due to the change in fixed overhead. Change in income (=30000\times2 = 60000) dollars (decrease because production increased and under variable costing, fixed overhead is expensed in the period. When production increases and sales stay the same, more fixed overhead is deferred under absorption costing, but under variable costing, the fixed overhead is expensed. Here, we assume the analysis is under variable costing - the key is the change in fixed overhead treatment. The formula for the change in income (under variable costing, considering the fixed overhead change) is based on the fact that the fixed overhead is expensed. The original fixed overhead per unit (if we consider the impact on income - since sales are same, the difference in fixed overhead expensed is ((\frac{150000}{30000}-\frac{150000}{50000})\times30000))

Answer:

( $60,000\ decrease)