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

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 net operating income of $90,000 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 4,200 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 2,200 units per year?

• Yes

• No