# The following information is available for Dunworth Canoes, a company that builds inexpensive...

## Question:

The following information is available for Dunworth Canoes, a company that builds inexpensive aluminum canoes:

2014 2015 Total
Units produced 20,440 14,760 35,200
Units sold 17,600 17,600 35,200
Selling price per unit $480$480
Variable production per unit $193.00$193.00
Direct material per unit $73$73
Direct labor per unit $44$44
Variable manufacturing overhead per unit $76$76
Fixed manufacturing overhead per year $654,080$654,080
Fixed selling and administrative expense per year $183,800$183,800

In its first year of operation, the company produced 20,440 units but was able to sell only 17,600 units. In its second year, the company needed to get rid of excess inventory (the extra 2,840 units produced but not sold in 2014) so it cut back production to 14,760 units.

1. Calculate profit for both years using full costing.

2014 2015
Net Profit 

2. Note that profit has declined in 2015. Is company performance actually worse using full costing in 2015 compared to 2014?

3. Calculate profit for both years using variable costing.

2014 2015
Net Profit 

4. Does variable costing profit present a more realistic view of firm performance in the two years?

## Full and Variable Costing:

There are two types of product costing and these are Full Costing and Variable Costing. Full costing includes the fixed manufacturing overhead as part of product cost while for Variable Costing treat it as a period cost being expense out during the period.

1 Full Costing 2014 2015
Sales
17,600 x $480 8,448,000.00 8,448,000.00 Less: Cost of Goods sold Direct Material 1,284,800 1,284,800 Direct Labor 774,400 774,400 Variable Manufacturing Overhead 1,337,600 1,337,600 Fixed Manufacturing Overhead 654,080 654,080 Total Product Cost 4,050,880 4,050,880 Divided by: Produced units 20,440 17,600 Product Cost per Unit 198 3,488,037.57 230 4,050,880.00 Gross Profit 4,959,962.43 4,397,120.00 Less: Operating Expense Variable Production 3,944,920 3,396,800 Fixed Selling & Administrative 183,800 4,128,720.00 183,800 3,580,600.00 Net Income 831,242.43 816,520.00 2 No, it does not mean that 2015 got worse. The computation of the cost of goods sold is being divided into no. of produced units and 2015 has only 17,600 lower than the produced units of 2014 of 20,440 3 Variable Costing 2,014 2015 Sales 17,600 x$480   8,448,000.00 8,448,000.00
Less: Cost of Goods sold
Direct Material 1,284,800   1,284,800
Direct Labor 774,400   774,400
Total Product Cost 3,396,800   3,396,800
Divided by: Produced units 20,440   17,600
Product Cost per Unit 166      2,924,837.57   193 3,396,800.00
Gross Profit   5,523,162.43 5,051,200.00
Less: Operating Expense
Variable Production 3,944,920   3,396,800
Fixed Selling & Administrative 183,800   4,782,800.00   183,800 4,234,680.00
Net Income   740,362.43 816,520.00
4 Full costing is more realistic in   computing the net income since it includes the fixed costs in computing the   product cost.