Question

Problem Six Harmony Lights produces flashlights. It has a varile manufacturing cost of $2.80 per unit, a yaciable selling cost of $0.90 per unit, a fixed manufacturing cost ar, and a fixed selling and administratives of $22. S wear. The selling price of each flashlight is $12.00. At the beginning of the year, Harmony had to units in Finished Goods. There are no units in beginning or ending W.L.P. inventory a. IF 11.400 units are prodused and sold by what amount will operating income difler under absorption and variable costing? Explain why this occurs. b. How much is expensed as period costs under absorption costing? Under variable costing? c. What happens to the cost per flashlight under absorption costing when more flashlights are produced? Explain why this occurs. d. The production manager receives a bonus based on gross margin for the year. Assume sales remain at 11,400 units. What effect will the production of 14,000 units have on her bonus (as compared to the production of 11.400 units)? Explain why this occurs. A) Vonable 10 of 10

Answer 1

Answer with explanations is given below

$136,800 (11,400*$12) $31,920 $39,600 a) Sales Less: Cost of goods sold Variable manufacturing cost Fixed manufacturing cost Gross Profit Less: Selling and administrative expenses (Fixed + Variable Cost) ($22,000+(11,400*0.90)) Net Operating Income (11,400*$2.80) $71,520 $65,280 $32,260 $33,020 $136,800 $31,920 $10,260 Sales Less: Variable Cost Manufacturing cost Selling and administrative expenses Contribution Less: Fixed Cost Manufacturing cost Selling and administrative expenses Net Operating Income $42,180 $94,620 $39,600 $22,000 $61,600 $33,020 The Operating Income will be same under Absorption costing and Variable costing because there is no closing inventory b) Period Costs Absorption Costing Selling and administrative expenses (includes both fixed and variable) $32,260 Variable Costing Fixed Manufacturing cost Fixed Selling and administrative expenses Total Period cost $39,600 $22,000 $61,600 c) The cost per flashlight will decrease under absorption costing when more production is done The reason is fixed manufacturing cost gets absorbed by more production units which will decrease cost per unit Cost per unit under absorption costing Direct Material Direct Labor Variable manufacturing cost Fixed manufacturing cost Product cost under absorption costing per unit remains same per unit remains same per unit remains same Cost per unit will decrease with more production | XXL x xxx d) Bonus calculation Sales $136,800 Less: Cost of Goods sold Variable manufacturing cost Fixed manufacturing cost Total manufacturing cost Less: Closing stock -($78,800/14,000* 2,600) Gross profit $39,200 $39,600 $78,800 $14,634 $64,166 $72,634 Gross Profit - when production is 11,400 units $65,280 Due to closing stock there will increase in gross profit for the year when production is higher than sales Hence the bonus payout will be higher when there is closing inventory during the year