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

Answer a.
Calculation of Cost per Unit
Under Absorption Costing
	Year 1	Year 2
No. of Units Produced	3,200	2,600
Direct Material	152.00	152.00
Direct Labor	58.00	58.00
Variable MOH	38.00	38.00
Fixed Factory Overhead
Year 1 - $166,400 / 3,200 Units	52.00	64.00
Year 2 - $166,400 / 2,600 Units
Total Cost per Unit	300.00	312.00
Note: Selling and administrative expenses (both variable and fixed) are not relevant for the computation of unit product cost in both absorption costing & variable costing.
Answer a.
		Year 1
Sales - 2,800 Units X $374		1,047,200.00
Cost of Goods Sold - 2,800 Units x $300		840,000.00
Gross Magin		207,200.00
Selling & Admn. Expenses
Variable - 2,800 Units x $4	11,200.00
Fixed	98,000.00	109,200.00
Net Income		98,000.00
Answer b.
		Year 1
Sales - 2,800 Units X $374		1,047,200.00
Cost of Goods Sold - 2,800 Units x $300		868,800.00
Gross Magin		178,400.00
Selling & Admn. Expenses
Variable - 2,800 Units x $4	11,200.00
Fixed	98,000.00	109,200.00
Net Income		69,200.00
Assuming FIFO Method is Used
Cost of Goods Sold
Beginning Inventory - 400 Units X $300	120,000.00
Current production - 2,400 Units X $312	748,800.00
Total Cost of Goods Sold	868,800.00
Answer.
Calculation of Cost per Unit
Under Variable Costing
	Year 1	Year 2
No. of Units Produced	3,200	2,600
Direct Material	152.00	152.00
Direct Labor	58.00	58.00
Variable MOH	38.00	38.00
Total Cost per Unit	248.00	248.00
Answer c.
		Year 1
Sales - 2,800 Units X $374		1,047,200.00
Variable Costs
Cost of Goods Sold - 2,800 Units x $248	694,400.00
Selling & Admn. Exp. - 2,800 Units x $4	11,200.00	705,600.00
Contribution Magin		341,600.00
Fixed Costs:
Manufacturing Overhead	166,400.00
Selling & Admn. Expenses	98,000.00	264,400.00
Net Income		77,200.00
Answer d.
		Year 2
Sales - 2,800 Units X $374		1,047,200.00
Variable Costs
Cost of Goods Sold - 2,800 Units x $248	694,400.00
Selling & Admn. Exp. - 2,800 Units x $4	11,200.00	705,600.00
Contribution Magin		341,600.00
Fixed Costs:
Manufacturing Overhead	166,400.00
Selling & Admn. Expenses	98,000.00	264,400.00
Net Income		77,200.00