Landau

1) 1. Under the proposed variable costing method the fixed production overhead is not considered to be a production costs but are instead considered period costs. This means that under the variable costing method the standard production cost per product is less than with the full costing method. When the cost of sales decreases the overall income before taxes increases.

2. The treasurer brought up the idea that eventually they would want to start marking up over variable costs but this only results in said issue if they do end up making that decision. The markup would still have to take into effect fixed production overhead as it is large amount of the companies cost of producing the product. Also the idea that the variable system is a myopic view point seems incorrect since it takes into effect all fixed costs for that period as opposed to the full costing which only takes into account the fixed costs for the products sold in that period. The president brings up a very good point that lower reported costs could be a detriment to the owner and bankers. This however could be avoided by explaining to them that the advantages of higher margins could offset these perceived losses.

3. Mr. Silver’s argument pertaining to products 129 and 243 makes a very strong case. When the fixed production overhead is taken out of the equation (1.16 for 129, .68 for 243) there is a total amount of $1.84 removed from overall inventoriable costs. This will eventually be removed as a lump sum through period costs but in general the idea that it increases unit margin and margin percent is true. Stressing product 129 would be the product to stress because it shows in a clear way how changing the cost system can change the profitability margin on any one product since the less profitable product under the full cost system actually turned out to be the more profitable product.

4. Landau should adopt the variable method because it shows a more in-depth view of the margin per product than...