(e) The net operating income (loss) under absorption costing is less than the net operating income (loss) under variable costing in Year 2 because:

check all that apply

1.Units were left over from the previous year.

2.The cost of goods sold is always less under variable costing than under absorption costing.

3.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 $60,000 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 4,400 units.

(a) Would this change result in a bonus being paid to the CEO?

multiple choice 1

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 2,500 units per year?

multiple choice 2

Yes

No

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