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# Houston Company: Absorption and Variable Costing Net Income

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Houston Company has per-unit fixed and variable manufacturing costs of \$40 and \$15, respectively. Variable selling and administrative costs are \$9 per unit. Consider the two independent cases that follow for the firm.
Case A: Variable-costing net income, \$110,000; sales, 6,000 units; production, 6,000 units
Case B: Variable-costing net income, \$178,000; sales, 7,500 units; production, 7,100 units

Required:

A. From a product-costing perspective, what is the basic difference between absorption costing
and variable costing?
B. Compute Houston's absorption-costing net income in Case A.
C. Compute Houston's absorption-costing net income in Case B.

#### Solution Summary

This solution helps compute Houston's absorption-costing net income in each of the cases.

\$2.19

## High Low method, Sensitivity analysis, operating leverage, break even

Bonkers, Inc. makes highly processed and sugary cereals for people that don't care
about their health. One of their costs is shipping of their products. In the year 2010
Bonkers incurred the following shipping costs:

MONTH NUMBER OF TONS SHIPPED COST

January 1,000 \$225,000
February 1250 \$235,000
March 1750 275,000
April 2250 320000
May 3000 330000
June 3500 345000
July 3450 350000
August 3300 343000
September 2750 315000
October 2000 255,000
November 1500 245,000
December 1250 240,000

Bonkers would like to know if you can come up with a cost formula to show its
management how much of its cost is fixed and how much is variable, or if it WORK SPACE
is even possible to do this. Using the high-low method, determine the
fixed cost and variable cost per ton to ship Bonkers cereas. Then
enter a cost formula in the form Y =a+bx Leave no spaces between the variables.
Looking at the other months and costs of shipping, do you think that the
high-low cost formula you calculated in 1 above is accurate?

1) VARIABLE 1
FIXED 2
COST FORMULA 3

word bank
yes
2) 4 no

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