Question

2.

Change all of the numbers in the data area of your worksheet so that it looks like this: 3 Data 4 Selling price per unit $374 5 Manufacturing costs: 6   Variable per unit produced: 7     Direct materials $152 8     Direct labor $58 9     Variable manufacturing overhead $38 10   Fixed manufacturing overhead per year $166,400 11 Selling and administrative expenses: 12   Variable per unit sold $4 13   Fixed per year $98,000 14 15 Year 1 Year 2 16 Units in beginning inventory 0 17 Units produced during the year 3,200 2,600 18 Units sold during the year 2,800 2,800

  

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 (Select all that apply.):
	( ) units were left over from the previous year ( ) The cost of goods sold is always less under variable costing than absorbtion costing ( ) Sales exceeded production so some of the fixed manufacturing overhead of the period was released from inventories under absorption costing

  

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 net operating income of $150,000 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 5,200 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 2,800 units per year?
	Yes No

Answer 1

1	Variable costing	1st year	2nd year
	Product cost
	Direct material	152	152
	Direct labor	58	58
	Variable manufacturing overhead	38	38
	Unit product cost	248	248
	Units manufactured	3200	2600
	Units sold	2,800	2,800
	Income statement
	Sales revenue	1047200	1047200
Less	Variable expense
	Variable cost of goods sold	694400	694400
	Variable selling and admin expense $4	11200	11200
	Total variable expense	705600	705600
	Contribution margin	341600	341600
Less	Fixed cost
	Fixed manufacturing expense	166400	166400
	Fixed Admin expense	98000	98000
	Total fixed expenses	264400	264400
	Net operating income	77200	77200
2	Absorption costing	1st year	2nd year
	Product cost
	Direct material	152	152
	Direct labor	58	58
	Variable manufacturing overhead	38	38
	Fixed manufacturing (166400/3200)	52	64	(166400/2600)
	Total product cost	300	312
	Units produced	3200	2600
	Units sold	2,800	2,800	units
	Income statement	1st year	2nd year
	Sales revenue	1047200	1047200
	cost of goods sold
	Beginning inventory	0	120000
	cost of goods manufactured	960000	811200
Add	Goods available for sale	960000	931200
	Ending inventory (400*300)	120000	62400	(200*312)
Less	Cost of goods sold	840000	868800
	Gross profit	207200	178400
	Selling and admin expenses
Less	Variable selling and admin expense	11200	14000
	Fixed Admin expense	98000	60000
	Total Selling and admin expenses	109200	74000
	Net operating income	98000	104400