Question

Company manufactures specialized chips that sell for $20 each. Hamilton’s manufacturing costs consist of variable costs of $2 per chip and fixed costs of $9,000,000. Hamilton also incurs $400,000 in fixed marketing costs each year. Company calculates operating income using absorption costing—that is, Company calculates manufacturing costs per unit by dividing total manufacturing costs by actual production. Company costs all units in inventory at this rate and expenses the costs in the income statement at the same time when the units in inventory are sold. The next year, 2020, appears to be a difficult year for the company. It expects to sell only 500,000 units. The demand for these chips fluctuates considerably so Hamilton usually holds minimal inventory.

REQUIRED: SHOW YOUR WORK

A. Calculate the company's  operating income in 2020 if the company manufactures (a) 500,000 units and, (b) 600,000 units.

Answer 1

Manufacturing Cost Per Unit = ($2+ $18) = $20. Units Per Unit 500000 600000 Units 20) 1000000012000000 $ A Particulars Sales Less: Cost of goods sold Manufacturing Cost Variable Fixed Gross Profit less : Fixed Expenses Marketing Expenses Net Operating Income/(loss) I 18 1000000 1200000 $ 9000000 9000000 $ 11800000 $ 400000 -400000 400000 $ 1400000 $ If you have any doubts please comment on the answer.