Zipp Cards buys baseball cards in bulk from the companies that produce them. Zipp buys sheets of 48 cards, then cuts the sheets into individual cards, and sorts and packages them, usually by team. Zipp then sells the packages to large discount stores. The accompanying table provides information regarding operations for 2010 and 2011.
Zipp Cards—Summary of Operations
| 2010 | 2011 | |
| Unit sales (of 48 cards)* | 50,000 | 48,000 |
| Price | $5.00 | $4.90 |
| Production in units | ||
| (budgeted = actual) | 50,000 | 75,000 |
| Variable cost | $1.00 | $1.00 |
| Fixed manufacturing overhead | $160,000 | $160,000 |
Volume is measured in terms of 48-card sheets processed. Budgeted production and actual production in 2010 were both 50,000 units. There were no beginning inventories on January 1, 2010. In 2011, budgeted and actual production rose to 75,000 units.
At the beginning of 2012, the president of Zipp was pleasantly surprised when the accountant showed her the income statement for the year 2011. The president remarked, “I’m surprised we made more money in 2011 than 2010. We had to cut prices and we didn’t sell as many units, yet we still made more money. Well, you’re the accountant and these numbers don’t lie.”
Required:
a. Prepare income statements for 2010 and 2011 using absorption costing.
b. Prepare a statement reconciling the change in net income from 2010 to 2011. Explain to the president why the firm made more money in 2011 than in 2010.
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