Question

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 19 .

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

	Unit Product Cost(Under Absorption Costing)
		Year 1	Year 2
	Material Cost	$                 152.00	$                 152.00
	Labor Cost	$                    58.00	$                    58.00
	Variable Manufacturing Cost	$                    38.00	$                    38.00
	Fixed Manufacturing Cost	$                    52.00	$                    64.00
	Total Unit   product cost	$                 300.00	$                 312.00
	Net income under Absorption costing
	Production	3200	2600
	Sales	2800	$              2,800.00
	Selling Price=(2800*$374)	$     1,047,200.00	$     1,047,200.00
	Variable Manufacturing Overhead=($152+$58+$38)*2800	$         694,400.00	$         694,400.00
	Fixed Manufacturing Overhead(Fixe ccost per unit*Number of units sold)	$         145,600.00	$         179,200.00
	Cost of goods sold	$         840,000.00	$         873,600.00
	Gross Margin=(Sales-Cost of goods sold)	$         207,200.00	$         173,600.00
	Variable Selling Expenses=(2800*$4)	$           11,200.00	$           11,200.00
	Fixed selling & Administerative Expenses	$           98,000.00	$           98,000.00
	Net Operating Income	$           98,000.00	$           64,400.00
	Net income under Absorption costing
		Year 2
	Production	5200
	Sales	2800
	Selling Price	$     1,047,200.00
	Variable Manufacturing Overhead	$         694,400.00
	Fixed Manufacturing Overhead	$           89,600.00
	Cost of goods sold	$         784,000.00
	Gross Margin	$         263,200.00
	Variable Selling Expenses=(2800*$4)	$           11,200.00
	Fixed selling & Administerative Expenses	$           98,000.00
	Net Operating Income	$         154,000.00
a)	Yes hafty bonus would be paid to CEO because net operting income exceeds the target income of $150000
b)	Net Income under absorption costing without any change is $64400.
c)	Yes doubling of production in year 2 be in the best interest of the company
	if sales are expecting to continue to be 2800 units per year because it would
	result fixed cost per unit of manufacturing would reduce from $179200 to $89600
	and net income increased by($154000-$64400)=$89600