Question

A plant with S million of fixed manufacturing overhead costs makes decks of playing cards with a variable manufacturing cost per deck of $ ! 00. The plant only mi kes playing cards and allocates a tỉ e ũye costs to the product by the number of decks produced. The firm can sell 200,000 decks a year for S10.00 cach. There is no beginning inventory. The plant manager has the opportunity to make 200,000 decks. 220,000 deeks, or 240,000 decks. Handling excess inventory costs 50.10 deck. Handling costs are expensed in the year' they are incurred. Which production level causes the highest reported income for the year?

Answer 1

	Production (units)
	200,000	220,000	240,000
Sales price	10	10	10
Variable cost	1	1	1
Fixed cost	5	4.545	4.167
Total cost	6	5.545	5.167
Sales	1,800,000	1,800,000	1,800,000
COGS	1,200,000	1,109,091	1,033,333
Operating income	600,000	690,909	766,667
Stock Handling cost	0	20,000	40,000	$ 0.1 per unit
Net Income	600,000	670,909	726,667

Hence the net reported income is higher if 240,000 units are produced.