1. Change all of the numbers in the data area of your worksheet so that it looks like this:

Data
Selling price per unit	$292
Manufacturing costs:
Variable per unit produced:
Direct materials	$125
Direct labor	$55
Variable manufacturing overhead	$23
Fixed manufacturing overhead per year	$172,800
Selling and administrative expenses:
Variable per unit sold	$7
Fixed per year	$74,000
	Year 1	Year 2
Units in beginning inventory	0
Units produced during the year	3,200	2,700
Units sold during the year	2,900	2,900

If your formulas are correct, you should get the correct answers to the following questions.

(a) What is the net operating income (loss) in Year 1 under absorption costing?

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

(c) What is the net operating income (loss) in Year 1 under variable costing?

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

(e) The net operating income (loss) under absorption costing is less than the net operating income (loss) under variable costing in Year 2 because (You may select more than one answer.)

• Units were left over from the previous year.unanswered
• The cost of goods sold is always less under variable costing than under absorption costing.unanswered
• Sales exceeded production so some of the fixed manufacturing overhead of the period was released from inventories under absorption costing.unanswered

3. Make a note of the absorption costing net operating income (loss) in Year 2.

At the end of Year 1, the companys board of directors set a target for Year 2 of the 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 5,400 units.

(a) Would this change result in a bonus being paid to the CEO? Yes or 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 2,900 units per year? yes or no?