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
19

.

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