=+20-35 KK Ethics, manager’s performance evaluation (A. Spero, adapted) OBJECTIVES 8, 9 BioChips manufactures specialised chips for electronic devices that sell for $5.40 each. BioChips’s manufacturing costs consist of variable costs of $0.22 per chip and fixed costs of $2500000. BioChips also incurs $200000 in fixed marketing costs each year.

BioChips calculates operating profit using absorption costing—that is, it calculates manufacturing cost per unit by dividing total manufacturing costs by actual production. BioChips costs all units in inventory at this rate and expenses the costs in the income statement at the time when the units in inventory are sold. Next year, 2015, appears to be a difficult year for BioChips. It expects to sell only 500000 units. The demand for these chips fluctuates considerably, so BioChips usually holds minimal inventory.

Required 1 Calculate BioChips’s operating profit in 2015:

(a) if it manufactures 500000 units and

(b) if it manufactures 600000 units.