Question

1) Based on the following assumptions and financial information, select all the true statements.

	Year 1	Year 2	Year 3	Year 4
Production in units	4,000	6,000	8,000	4,000
Sales in units	4,000	3,000	3,000	11,000

(1) Selling price per unit, variable cost per unit, and total fixed costs do not change during the four years.

(2) There is no beginning inventory at Year 1.

	A.	The combined four year net operating income would be the same under variable and absorption costing.
	B.	Because of the changes in production level, under absorption costing the unit product cost will change each year.
	C.	Under variable costing, net operating income will be less in Year 1 than in Year 2.
	D.	Under absorption costing, net operating income will be the same in Year 2 and Year 3.
	E.	Under variable costing, net operating income will be the same in Year 2 and Year 3.

2)

Sales above the break-even point will result in net profit equal to _______.

	A.	number of units above break-even times fixed cost per unit
	B.	number of units above break-even times variable cost per unit
	C.	number of units above break-even times contribution margin per unit
	D.	number of units above break-even times sales price per unit

Answer 1

Answer

2.

Option A is true, as Net Income Under Absorption Costing and Variable Costing can be different in different year but If we combine all year profit then the Profit will be same under both system.

Option B is also true, as Under Variable Costing we include only Variable Mfg. cost during per unit calculation and in Absorption Costing we include Variable Mfg Cost + fixed Mfg. cost per unit, so basically there is a difference of fixed Mfg. cost per unit.

So if there is a change in Production Level, then fixed Mfg. cost per unit will also change which results in different fixed Mfg. cost per unit.

Option C is false, Year 2 Income will be less than Year 1 as we produced and sold 4,000 Units in year 1 and In Year 2, we produced 6,000 and sold 3,000 so in net we sold 3,000 units so profit will be less than Year 1.

Option D is false, as sales price, variable cost and fixed cost will be same in all year and we produced different Units in Year 2 and Year 3, which will have different Fixed Mfg cost per unit, so Net Income cannot be same.

Option E is true as we know that sales price, variable cost and fixed cost will be same in all year and we have sold the same no. of units in both year so the Net Income will be same in Year 2 and 3

2.

Option C is correct as Breakeven point is a point where the profit will be Equal to cost (variable + Fixed Cost). So at breakeven we have sufficient unit to cover cost

And above any units sold over Breakeven, we have incurred only Variable cost as fixed cost is already covered by breakeven point sale, so

Increase in Profit = Number of units above break-even * contribution margin per unit

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