Scott Manufacturing produces a single product with total unit manufacturing costs of $54, of which $36 is variable. There were no units on hand at the beginning of 2015. During 2015 and 2016, all manufactured products were sold for $84 per unit, and the cost structure remained unchanged. Scott uses the first-in, first-out (FIFO) inventory method and has the following production and sales for 2015 and 2016:
1. Prepare gross profit computations for 2015 and 2016 using absorption costing. Do not use negative signs with your answers.
2. Prepare gross profit computations for 2015 and 2016 using variable costing. Do not use negative signs with your answers.
3. Explain how your answers illustrate the impact of differences between production and sales volumes on the gross profits reported each year under absorption and variable costing.
Select the most appropriate statement:
A. If production volume exceeds sales volume, the absorption costing gross profit will be higher than the variable costing gross profit.
B. If sales volume exceeds production volume, the absorption costing gross profit will be higher than the variable costing gross profit.
C. If production volume exceeds sales volume, the variable costing gross profit will be higher than the absorption costing gross profit.
D. If sales volume exceeds production volume, the variable costing gross profit will be lower than the absorption costing gross profit.