In: Accounting
1. Change all of the numbers in the data area of your worksheet so that it looks like this:
If your formulas are correct, you should get the correct answers to the following questions. (a) What is the net operating income (loss) in Year 1 under absorption costing?(b) What is the net operating income (loss) in Year 2 under absorption costing? (c) What is the net operating income (loss) in Year 1 under variable costing? (d) What is the net operating income (loss) in Year 2 under variable costing? (e) The net operating income (loss) under absorption costing is less than the net operating income (loss) under variable costing in Year 2 because (You may select more than one answer.)
3. Make a note of the absorption costing net operating income (loss) in Year 2. At the end of Year 1, the company’s board of directors set a target for Year 2 of the net operating income of $70,000 under absorption costing. If this target is met, a hefty bonus would be paid to the CEO of the company. Keeping everything else the same from part (2) above, change the units produced in Year 2 to 5,400 units. (a) Would this change result in a bonus being paid to the CEO? Yes or No?(b) What is the net operating income (loss) in Year 2 under absorption costing? (c) Would this doubling of production in Year 2 be in the best interests of the company if sales are expected to continue to be 2,900 units per year? yes or no? |
1) | ||
Absorbtion Costing Income Statement | ||
Units | 2,900 | 2900 |
Year 1 | Year 2 | |
Revenue | $ 8,46,800.00 | $ 8,46,800.00 |
Less: Manufacturing costs | ||
Direct materials | $ 3,62,500.00 | $ 3,62,500.00 |
Direct labor | $ 1,59,500.00 | $ 1,59,500.00 |
Variable manufacturing overhead | $ 66,700.00 | $ 66,700.00 |
Fixed manufacturing overhead per year | $ 1,56,600.00 | $ 1,82,600.00 |
Gross Profit | $ 1,01,500.00 | $ 75,500.00 |
Less: Selling and administrative expenses: | ||
Variable selling and administrative exp. | $ 20,300.00 | $ 20,300.00 |
Fixed selling and administrative | $ 74,000.00 | $ 74,000.00 |
Net operating Income | $ 7,200.00 | $ -18,800.00 |
Variable Costing Income Statement | ||
Units | 2,900 | 2,900 |
Year 1 | Year 2 | |
Revenue | $ 8,46,800.00 | $ 8,46,800.00 |
Less: Manufacturing costs | ||
Direct materials | $ 3,62,500.00 | $ 3,62,500.00 |
Direct labor | $ 1,59,500.00 | $ 1,59,500.00 |
Variable manufacturing overhead | $ 66,700.00 | $ 66,700.00 |
Variable selling and administrative exp. | $ 20,300.00 | $ 20,300.00 |
Contribution Margin | $ 2,37,800.00 | $ 2,37,800.00 |
Fixed manufacturing overhead per year | $ 1,72,800.00 | $ 1,72,800.00 |
Fixed selling and administrative | $ 74,000.00 | $ 74,000.00 |
Net operating Income | $ -9,000.00 | $ -9,000.00 |
e) The net operating income (loss) under absorption costing is less than the net operating income (loss) under variable costing in Year 2 because (You may select more than one answer.) | ||
Units were left over from the previous year. | ||
The cost of goods sold is always less under variable costing than under absorption costing. | ||
Sales exceeded production so some of the fixed manufacturing overhead of the period was released from inventories under absorption costing. | ||
All are correct. |