(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. Single-click the box with the question mark to produce a checkmark for a correct answer and double click the box with the question mark to empty the box for a wrong answer. Any boxes left with a question mark will be automatically graded as incorrect.)

Units were left over from the previous year.

The cost of goods sold is always less under variable costing than under absorption 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 $180,000 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 5,600 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 2,900 units per year?

Yes No

A B 1 Chapter 4: Applying Excel 2 $ 298 $ 123 $ 80 3 Data 4 Selling price per unit 5 Manufacturing costs: 6 Variable per unit produced: 7 Direct materials 8 Direct labor 9 Variable manufacturing overhead 10 Fixed manufacturing overhead per year 11 Selling and administrative expenses: 12 Variable per unit sold 13 Fixed per year 14 $ 36 $ 92,000 $ 2 $ 55,000 15 Year 1 Year 2 16 Units in beginning inventory 17 Units produced during the year 18 Units sold during the year 0 2,300 2,000 2,100 2,100