Problem 5.4 (LO1, 2)Variable and Full Costing: Earnings Management with FullCosting; Changes in Production and Sales Sampson Steelproduces high-quality worktables. The company has been in operationfor three years, and sales have declined each year due to increasedcompetition. The following information is available:
| 2020 | 2021 | 2022 | Total |
Units sold | 10,000 | 9,000 | 8,000 | 27,000 |
Units produced | 10,000 | 10,000 | 7,000 | 27,000 |
Fixed production costs | $350,000 | $350,000 | $350,000 | |
Variable production costs per unit | $100 | $100 | $100 | |
Selling price per unit | $350 | $350 | $350 | |
Fixed selling and administrative expenses | $300,000 | $300,000 | $300,000 | |
Required
- Calculate profit and the value of ending inventory for eachyear under full costing.
- Calculate profit and the value of ending inventory for eachyear under variable costing.
- Explain how management of Sampson could manipulate earnings in2021 by producing more units than are actually needed to meetdemand. Could this approach to earnings management be repeated yearafter year?
