Question

Chapter 6: Applying Excel 2 3 Data 4 Selling price per unit 5 Manufacturing costs 6 Variable per unit produced 7 Direct materials 8Direct labor 9Variable manufacturing overhead 10 Fixed manufacturing overhead per year 11 Selling and administrative expenses: 12 Variable per unit sold 13 Fixed per year $331 $150 $56 $33 $93,600 $4 $52,000 Year 1 Year 2 16 Units in beginning inventory 17 Units produced during the year 18 Units sold during the year 19 2,600 2,100 1,800 2,100

(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.):

  

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 $70,000 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 3,600 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 2,100 units per year?
	Yes No

Answer 1

e) Answer: Sales exceeded production so some of the fixed manufacturing overhead of the period was released from inventories under absorption costing.
3) Absorption costing:
Sales	2100*331	695100
Less: Manuf costs:
variable	2100*239	501900
fixed		93600
closing stock	137500*300/500	82500
COGS		678000
Gross Profit		17100
Less: S & Ad. Expenses:
variable	2100*4	8400
fixed		52000
Total S & Ad.		60400
Net Operating Loss		-43300
In the second year, the portion of fixed manufacturing cost of first year entered to second year through closing stock, so there is a NOL in second year.
3) Absorption costing:
Production (units)		3600
Sales	2100*331	695100
Less: Manuf costs:
variable	2100*239	501900
fixed	93600*1800/3600	46800
closing stock		82500
COGS		631200
Gross Profit		63900
Less: S & Ad. Expenses:
variable	2100*4	8400
fixed		52000
Total S & Ad.		60400
Net Operating income		3500
a) No, the change would not result in a bonus being paid to the CEO as NOI is only $3500 instead of $70000 as fixed.
b)The net operating income in Y2 under absorption costing was $3500
c) No, it would not be in the best interests of the company as it mounts the closing stock.