Zeflax Bottles
Zeflax manufactures insulated plastic bottles for bikes that the company sells for $4.00 per bottle. Last year the company produced 230,000 bottles and sold 200,000 bottles. This year Zeflax produced 200,000 bottles and sold 230,000 bottles. In both years Zeflax’s fixed manufacturing cost was $500,000 and its variable manufacturing cost was $1.00 per bottle. The president of Zeflax commented, “I don’t understand these crazy financial statements. Our prices and costs didn’t change, we sell more bottles this year, and we show lower income. Something has got to be wrong.”
Required:
a. Prepare income statements for Zeflax for last year and this year using absorption costing. Assume that Zeflax’s only costs are the fixed and variable manufacturing costs given in the problem.
b. Prepare income statements for Zeflax for last year and this year using variable costing. Assume that Zeflax’s only costs are the fixed and variable manufacturing costs given in the problem.
c. Explain to the president of Zeflax in nontechnical terms why the financial statements prepared by the accountant in part (a) are not in error. In other words, explain to the president why net income fell this year from last year even though Zeflax sold more bottles.
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