Starfax, Inc., manufactures a small part that is widely used in various electronic products such as home computers. Results for the first three years of operations were as follows (absorption costing basis):
Year 1 | Year 2 | Year 3 | ||||||||
Sales | $ | 1,100,000 | $ | 850,000 | $ | 1,100,000 | ||||
Cost of goods sold | 850,000 | 600,000 | 900,000 | |||||||
Gross margin | 250,000 | 250,000 | 200,000 | |||||||
Selling and administrative expenses | 220,000 | 190,000 | 220,000 | |||||||
Net operating income (loss) | $ | 30,000 | $ | 60,000 | $ | (20,000 | ) | |||
In the latter part of Year 2, a competitor went out of business and in the process dumped a large number of units on the market. As a result, Starfax’s sales dropped by 20% during Year 2 even though production increased during the year. Management had expected sales to remain constant at 50,000 units; the increased production was designed to provide the company with a buffer of protection against unexpected spurts in demand. By the start of Year 3, management could see that it had excess inventory and that spurts in demand were unlikely. To reduce the excessive inventories, Starfax cut back production during Year 3, as shown below:
Year 1 | Year 2 | Year 3 | |
Production in units | 50,000 | 60,000 | 40,000 |
Sales in units | 50,000 | 40,000 | 50,000 |
Additional information about the company follows:
The company’s plant is highly automated. Variable manufacturing expenses (direct materials, direct labor, and variable manufacturing overhead) total only $5.00 per unit, and fixed manufacturing overhead expenses total $600,000 per year.
A new fixed manufacturing overhead rate is computed each year based that year's actual fixed manufacturing overhead costs divided by the actual number of units produced.
Variable selling and administrative expenses were $3 per unit sold in each year. Fixed selling and administrative expenses totaled $70,000 per year.
The company uses a FIFO inventory flow assumption. (FIFO means first-in first-out. In other words, it assumes that the oldest units in inventory are sold first.)
Starfax’s management can’t understand why profits doubled during Year 2 when sales dropped by 20% and why a loss was incurred during Year 3 when sales recovered to previous levels.
Required:
1. Prepare a contribution format variable costing income statement for each year.
2. Refer to the absorption costing income statements above.
a. Compute the unit product cost in each year under absorption costing. Show how much of this cost is variable and how much is fixed.
b. Reconcile the variable costing and absorption costing net operating income figures for each year.
5b. If Lean Production had been used during Year 2 and Year 3, what would the company’s net operating income (or loss) have been in each year under absorption costing?
Part 1
Year 1 |
Year 2 |
Year 3 |
|
Sales |
1100000 |
850000 |
1100000 |
Variable expenses: |
|||
Variable cost of goods sold (50000*5=250000); (40000*5=200000); (50000*5=250000) |
250000 |
200000 |
250000 |
Variable selling and administrative expenses (50000*3=150000); (40000*3=120000); (50000*3=150000) |
150000 |
120000 |
150000 |
Total variable expenses |
400000 |
320000 |
400000 |
Contribution margin |
700000 |
530000 |
700000 |
Fixed expenses: |
|||
Fixed manufacturing overhead |
600000 |
600000 |
600000 |
Fixed selling and administrative expenses |
70000 |
70000 |
70000 |
Total fixed expenses |
670000 |
670000 |
670000 |
Net operating income (loss) |
$30000 |
$(140000) |
$30000 |
Part 2 A
Year 1 |
Year 2 |
Year 3 |
|
Variable manufacturing costs |
5 |
5 |
5 |
Fixed manufacturing costs |
12 (600000/50000) |
10 (600000/60000) |
15 (600000/40000) |
Unit product cost |
$17 |
$15 |
$20 |
Part 2 B
Year 1 |
Year 2 |
Year 3 |
|
Variable costing net operating income (loss) |
30000 |
(140000) |
30000 |
Add (Deduct): Fixed manufacturing overhead cost deferred in inventory from Year 2 to Year 3 under absorption costing (10*(60000-40000)) |
200000 |
(200000) |
|
Add: Fixed manufacturing overhead cost deferred in inventory from Year 3 to the future under absorption costing (10000*15) (40000+20000-50000) |
150000 |
||
Absorption costing net operating income (loss) |
30000 |
60000 |
(20000) |
Part 5 B
Year 1 |
Year 2 |
Year 3 |
|
Unit sales |
50000 |
40000 |
50000 |
Sales |
1100000 |
850000 |
1100000 |
Cost of goods sold |
|||
Cost of goods manufactured |
850000 |
680000 |
850000 |
Add underapplied overhead |
120000 |
||
Cost of goods sold |
850000 |
800000 |
850000 |
Gross margin |
250000 |
50000 |
250000 |
Selling and administrative expenses |
220000 |
190000 |
220000 |
Net operating income (loss) |
30000 |
(140000) |
30000 |
40000*17 = 680000
(50000-40000)*12 = 120000
Starfax, Inc., manufactures a small part that is widely used in various electronic products such as...
Starfax, Inc., manufactures a small part that is widely used in various electronic products such as home computers. Results for the first three years of operations were as follows (absorption costing basis): Year 1 Year 2 Year 3 Sales $ 1,100,000 $ 838,000 $ 1,100,000 Cost of goods sold 860,000 608,000 910,000 Gross margin 240,000 230,000 190,000 Selling and administrative expenses 220,000 190,000 220,000 Net operating income (loss) $ 20,000 $ 40,000 $ (30,000 ) In the latter part...
Starfax, Inc., manufactures a small part that is widely used in various electronic products such as home computers. Results for the first three years of operations were as follows (absorption costing basis): Year 1 Year 2 Year 3 Sales $ 1,000,000 $ 790,000 $ 1,000,000 Cost of goods sold 740,000 520,000 785,000 Gross margin 260,000 270,000 215,000 Selling and administrative expenses 220,000 190,000 220,000 Net operating income (loss) $ 40,000 $ 80,000 $ (5,000 ) In the latter part...
Starfax, Inc., manufactures a small part that is widely used in various electronic products such as home computers. Results for the first three years of operations were as follows (absorption costing basis): Year 1 Year 2 Year 3 Sales $ 1,000,000 $ 790,000 $ 1,000,000 Cost of goods sold 740,000 520,000 785,000 Gross margin 260,000 270,000 215,000 Selling and administrative expenses 220,000 190,000 220,000 Net operating income (loss) $ 40,000 $ 80,000 $ (5,000 ) In the latter part...
Starfax, Inc., manufactures a small part that is widely used in various electronic products such as home computers. Results for the first three years of operations were as follows (absorption costing basis): Year 1 Year 2 Year 3 Sales $ 1,000,000 $ 790,000 $ 1,000,000 Cost of goods sold 705,000 500,000 745,000 Gross margin 295,000 290,000 255,000 Selling and administrative expenses 260,000 220,000 260,000 Net operating income (loss) $ 35,000 $ 70,000 $ (5,000 ) In the latter part...
Starfax, Inc., manufactures a small part that is widely used in various electronic products such as home computers. Results for the first three years of operations were as follows (absorption costing basis): Sales Cost of goods sold Gross margin Selling and administrative expenses Net operating income (loss) Year 1 $1,000,000 740,000 260,000 230,000 $ 30,000 Year 2 $ 780,000 520,000 260,000 200,000 $ 60,000 Year 3 $1,000,000 785,000 215,000 230,000 $ (15,000) In the latter part of Year 2, a...
Starfax, Inc., manufactures a small part that is widely used in various electronic products such as home computers. Results for the first three years of operations were as follows (absorption costing basis): Sales Cost of goods sold Gross margin Selling and administrative expenses Net operating income (loss) Year 1 $1,000,000 760,000 240,000 230,000 $ 10,000 Year 2 $ 730,000 512,000 218,000 198,000 $ 20,000 Year 3 $1,000,000 788.500 211,500 230,000 $ (18,500) In the latter part of Year 2, a...
Starfax, Inc., manufactures a small part that is widely used in various electronic products such as home computers. Results for the first three years of operations were as follows (absorption costing basis): Sales Cost of goods sold Gross margin Selling and administrative expenses Net operating income (loss) Year 1 $ 819,200 593,920 225,280 194,560 $ 30,720 Year 2 $ 655,360 409,600 245, 760 184,320 $ 61,440 Year 3 $ 819,200 634,880 184,320 174,080 $ 110,2401 In the latter part of...
Starfax, Inc., manufactures a small part that is widely used in various electronic products such as home computers. Results for the first three years of operations were as follows (absorption costing basis Sales Cost of goods sold GEOSS margin Selling and administrative expenses Net operating income (loss) Year 1 $1,000,000 760,000 240,000 230,000 $ 10,000 Year 2 $ 730,000 512.000 218,000 199,000 $20,000 20.000 Year 3 $1,000,000 788,500 211,500 230,000 $ (18,500) In the latter part of Year 2. a...
Check my workCheck My Work button is now enabled1 Item 4 Item 4 27.5 points Item Skipped Starfax, Inc., manufactures a small part that is widely used in various electronic products such as home computers. Results for the first three years of operations were as follows (absorption costing basis): Year 1 Year 2 Year 3 Sales $ 1,100,000 $ 838,000 $ 1,100,000 Cost of goods sold 860,000 608,000 910,000 Gross margin 240,000 230,000 190,000 Selling and administrative expenses 220,000 190,000...
Sales Cost of goods sold Gross margin Selling and administrative expenses Net operating income (loss) Year 1 $1,000,000 740,000 260,000 230,000 $ 30,000 Year 2 $ 780,000 520,000 260,000 200,000 $ 60,000 Year 3 $1,000,000 785,000 215,000 230,000 $ (15,000) In the latter part of Year 2, a competitor went out of business and in the process dumped a large number of units on the market. result, Starfax's sales dropped by 20% during Year 2 even though production increased during...