2.

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

3	Data
4	Selling price per unit	$374
5	Manufacturing costs:
6	Variable per unit produced:
7	Direct materials	$152
8	Direct labor	$58
9	Variable manufacturing overhead	$38
10	Fixed manufacturing overhead per year	$166,400
11	Selling and administrative expenses:
12	Variable per unit sold	$4
13	Fixed per year	$98,000
14
15		Year 1	Year 2
16	Units in beginning inventory	0
17	Units produced during the year	3,200	2,600
18	Units sold during the year	2,800	2,800

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 (Select all that apply.):
	( ) units were left over from the previous year ( ) The cost of goods sold is always less under variable costing than absorbtion costing ( ) Sales exceeded production so some of the fixed manufacturing overhead of the period was released from inventories under absorption costing

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 net operating income of $150,000 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 5,200 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 2,800 units per year?

	Yes
	No