Alice Bohne obtained a patent on a small electronic device and organized Bohne Products, Inc., to produce and sell the device. During the first month of operations, the device was very well received on the market, so Ms. Bohne looked forward to a healthy profit. For this reason, she was surprised to see a loss for the month on her income statement. This statement was prepared by her accounting service, which takes great pride in providing its clients with timely financial data. The statement follows:

Bohne Products, Inc. Income Statement
Sales (21,000 units)			$	762,300
Variable expenses:
Variable cost of goods sold	$	254,100
Variable selling and administrative expenses		161,700		415,800
Contribution margin				346,500
Fixed expenses:
Fixed manufacturing overhead		194,400
Fixed selling and administrative expenses		219,000		413,400
Net operating loss			$	(66,900)

Ms. Bohne is discouraged over the loss shown for the month, particularly because she had planned to use the statement to encourage investors to purchase stock in the new company. A friend, who is a CPA, insists that the company should be using absorption costing rather than variable costing. He argues that if absorption costing had been used, the company would probably have reported a profit for the month.

Selected cost data relating to the product and to the first month of operations follow:

Units produced		24,000
Units sold		21,000
Variable costs per unit:
Direct materials	$	7.40
Direct labor	$	3.00
Variable manufacturing overhead	$	1.70
Variable selling and administrative expenses	$	7.70

Required:

1.	Complete the following:

a.	Compute the unit product cost under absorption costing. (Round your intermediate and final answers to 2 decimal places.)

Unit product cost

$

b.	Redo the companys income statement for the month using absorption costing. (Input all amounts as positive values except losses which should be indicated by a minus sign. Round your intermediate calculations to 2 decimal places.)

Absorption Costing Income Statement
(Click to select) Net operating income (loss) Selling and administrative expenses Gross margin Cost of goods sold Sales	$
(Click to select) Net operating income (loss) Sales Cost of goods sold Selling and administrative expenses Gross margin
(Click to select) Gross margin Contribution margin
(Click to select) Cost of goods sold Selling and administrative expenses Net operating income (loss) Sales Gross margin
(Click to select) Net operating loss Net operating income	$

c.	Reconcile the variable and absorption costing net operating income (loss) figures. (Loss amounts and amounts to be deducted should be indicated with a minus sign. Round your intermediate calculations to 2 decimal places.)

Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes

Variable costing net operating income (loss)

$

(Click to select) Deduct Add : (Click to select) Fixed manufacturing overhead cost deferred in inventory Fixed manufacturing overhead cost released from inventory

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Absorption costing net operating income (loss)

$

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Electromix, Inc., manufactures and sells a unique electronic part. Operating results for the first three years of activity were as follows (absorption costing basis):

	Year 1		Year 2		Year 3
Sales	$	1,000,000	$	800,000	$	1,000,000
Cost of goods sold		760,000		512,000		788,500
Gross margin		240,000		288,000		211,500
Selling and administrative expenses		230,000		198,000		230,000
Net operating income (loss)	$	10,000	$	90,000	$	(18,500)

Sales dropped by 20% during Year 2 due to the entry of several foreign competitors into the market. Electromix had expected sales to remain constant at 40,000 units for the year; production was set at 50,000 units in order to build a buffer of protection against unexpected spurts in demand. By the start of Year 3, management could see that spurts in demand were unlikely and that the inventory was excessive. To work off the excessive inventories, Electromix cut back production during Year 3, as shown below:

	Year 1	Year 2	Year 3
Production in units	40,000	50,000	32,000
Sales in units	40,000	32,000	40,000

Additional information about the company follows:

a.	The companys plant is highly automated. Variable manufacturing costs (direct materials, direct labor, and variable manufacturing overhead) total only $4 per unit, and fixed manufacturing overhead costs total $600,000 per year.
b.	Fixed manufacturing overhead costs are applied to units of product on the basis of each years production. That is, a new fixed overhead rate is computed each year.
c.	Variable selling and administrative expenses are $4 per unit sold. Fixed selling and administrative expenses total $70,000 per year.
d.	The company uses a FIFO inventory flow assumption.

Electromixs management cant understand why profits increased during Year 2 when sales dropped by 20%, and why a loss was incurred during Year 3 when sales recovered to previous levels.

Required:

1.	Prepare a contribution format variable costing income statement for each year. (Input all amounts as positive values except losses which should be indicated by a minus sign.)

Variable Costing Income Statement
	Year 1	Year 2	Year 3
Unit sales	40,000	32,000	40,000
(Click to select) Fixed selling and administrative expenses Variable selling and administrative expenses Variable cost of goods sold Sales Net operating income (loss) Fixed manufacturing overhead Contribution margin	$	$	$
Variable expenses:
(Click to select) Fixed manufacturing overhead Fixed selling and administrative expenses Sales Net operating income (loss) Direct materials Contribution margin Variable cost of goods sold
(Click to select) Fixed selling and administrative expenses Sales Fixed manufacturing overheads Variable selling and administrative expenses Net operating income (loss) Contribution margin Direct materials
Total variable expenses
(Click to select) Contribution margin Gross margin
Fixed expenses:
(Click to select) Contribution margin Sales Net operating income (loss) Direct materials Fixed manufacturing overhead Variable selling and administrative expenses Variable cost of goods sold
(Click to select) Sales Variable cost of goods sold Fixed selling and administrative expenses Contribution margin Variable selling and administrative expenses Net operating income (loss) Direct materials
Total fixed expenses
Net operating income (loss)	$	$	$

2a.	Compute the unit product cost in each year under absorption costing. (Round your intermediate and final answers to 2 decimal places.)

	Year 1	Year 2	Year 3
Unit product cost	$	$	$

2b.	Reconcile the variable costing and absorption costing net operating incomes for each year. (Leave no cells blank - be certain to enter "0" wherever required. Loss amounts and amounts to be deducted should be indicated with a minus sign. Round your intermediate calculations to 2 decimal places.)

Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes
	Year 1	Year 2	Year 3
Variable costing net operating income (loss)	$	$	$
Add (Deduct) fixed manufacturing overhead cost deferred in (released from) Year 2 and released in year 3
Add (Deduct) fixed manufacturing overhead cost deferred in (released from) inventory from Year 3 to the future under absorption costing
Absorption costing net operating income (loss)	$	$	$

5b.	If Lean Production had been in use during Year 2 and Year 3, and the predetermined overhead rate is based on 40,000 units per year, what would the companys net operating income (or loss) have been in each year under absorption costing?(Loss amounts should be indicated with a minus sign.)

Year 1	(Click to select) Net operating loss Net operating income	$
Year 2	(Click to select) Net operating loss Net operating income
Year 3	(Click to select) Net operating income Net operating loss