Question

	A	B	C	D
1	Chapter 5: Applying Excel
2
3	Data
4	Selling price per unit	$321
5	Manufacturing costs:
6	Variable per unit produced:
7	Direct materials	$141
8	Direct labor	$69
9	Variable manufacturing overhead	$40
10	Fixed manufacturing overhead per year	$127,600
11	Selling and administrative expenses:
12	Variable per unit sold	$5
13	Fixed per year	$65,000
14
15		Year 1	Year 2
16	Units in beginning inventory	0
17	Units produced during the year	2,900	2,200
18	Units sold during the year	2,400	2,400
19

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?

  

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 net operating income of $20,000 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 4,400 units.

  

(a) Would this change result in a bonus being paid to the CEO?

	Yes
	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 2,400 units per year?

	Yes
	No

Answer 1