Question

A В. C 1 Chapter 6: Applying Excel 2 3 Data 4 $ 309 5 Selling price per unit Manufacturing costs: Variable per unit produced: Direct materials 6 7 $ 153 8 $ 55 9 $ 37 10 $ 110,000 Direct labor Variable manufacturing overhead Fixed manufacturing overhead per year Selling and administrative expenses: Variable per unit sold Fixed per year 12 $ 9 13 $ 47,000 14 Year 1 Year 2 0 15 16 Units in beginning inventory 17 Units produced during the year 18 Units sold during the year 2,200 2,500 2,300 2,300

A) What is the net operating income (loss) in Year 2 under absorption costing?

B) At the end of Year 1, the company’s board of directors set a target for Year 2 of net operating income of $20,000 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 above, change the units produced in Year 2 to 4,400 units.

What is the net operating income (loss) in Year 2 under absorption costing?

Answer 1

A)	Unit cost:
						Year 1	Year 2
	Direct materials					153	153
	Direct labor					55	55
	Variable manufacturing overhead					37	37
	Fixed manufacturing overhead					44	50
	(Based on units produced)					(110000/2500)	(110000/2200)
	Total					289	295
						$	$
	Sales			(2300*309)			710700
	(Units sold*Selling price per unit)
	Cost of goods sold:
	Inventory,Jan 1,Year 2			(200*289)		57800
	(Inventory in units*Unit cost for year 1)
	Variable cost of goods manufactured				(2200*295)	649000
	(Units produced*Unit cost for year 2)
	Less:Inventory,Dec 31,Year 2			(100*295)		29500	677300
	(Inventory in units*Unit cost for year 2)
	Gross margin						33400
	Less:Selling and administrative expenses
	Variable			(2300*9)		20700
	(units sold*variable per unit)
	Fixed					47000
	Total selling and administrative expenses						67700
	Operating income/(loss)						-34300
	Inventory in units as on Jan 1,Year 2=Units in beginning inventory+Units produced-Units sold=0+2500-2300=200 units
	Inventory in units as on Dec 31,Year 2=Units in beginning inventory+Units produced-Units sold=200+2200-2300=100 units
B)	Unit cost:
						Year 1	Year 2
	Direct materials					153	153
	Direct labor					55	55
	Variable manufacturing overhead					37	37
	Fixed manufacturing overhead					44	25
	(Based on units produced)					(110000/2500)	(110000/4400)
	Total					289	270

710700 57800 1188000 $ Sales (2300*309) (Units sold*Selling price per unit) Cost of goods sold: Inventory,Jan 1, Year 2 (200*289) (Inventory in units*Unit cost for year 1) Variable cost of goods manufactured (4400*270) (Units produced*Unit cost for year 2) Less:Inventory,Dec 31, Year 2 (2300*270) (Inventory in units*Unit cost for year 2) Gross margin Less:Selling and administrative expenses Variable (2300*9) (units sold*variable per unit) Fixed Total selling and administrative expenses Operating income/(loss) 621000 624800 85900 20700 47000 67700 18200 Inventory in units as on Jan 1, Year 2=Units in beginning inventory+Units produced Units sold=0+2500-2300=200 units Inventory in units as on Dec 31, Year 2=Units in beginning inventory+Units produced-Units sold=200+4400-2300=2300 units