es Budgeted (estimated) production Budgeted sales Capacity Selling price Variable manufacturing cost Total manufacturing overhead cost (all fixed) Selling and administrative expenses (all fixed) Beginning inventories Traditional Approach to Computation of the Predetermined Overhead Rate 81,000 units 81,000 units 100,000 units $ 71 per unit $ 16 per unit $ 2,106,000 $ 2,128,000 $ 0 Estimated total manufacturing overhead cost, $2,106,000/ Estimated total units produced, 81,000 $26.00 per unit Budgeted Income Statement Revenue (81,000 units x $71 per unit) Cost of goods sold: Variable manufacturing (81,000 units x $16 per unit) Manufacturing overhead applied (81,000 units x $26 per unit) Gross margin Selling and administrative expenses Net operating income $ 5,751,000 $ 1,296,000 2,106,000 3,402,000 2,349,000 2,128,000 $ 221,000 New Approach to Computation of the Predetermined Overhead Rate Using Capacity in the Denominator Estimated total manufacturing overhead cost at capacity, $2,106,000/ Total units at capacity, 100,000 units $21.06 per unit Revenue (81,000 units x $71 per unit) Cost of goods sold: 1 Budgeted Income Statement Variable manufacturing (81,000 units x $16 per unit) Manufacturing overhead applied (81,000 units x $21.06 per unit) Gross margin Cost of unused capacity [(100,000 units 81,000 units) x $21.06 per unit] Selling and administrative expenses Net operating income ces 3.: Marvin: Pat: 3.: Marvin: 3.1 Pat: 3.1 $ 5,751,000 $ 1,296,000 1,705,860 3,001,860 2,749,140 400,140 2,128,000 Whoa!! I don't think I like the looks of that "Cost of unused capacity." If that thing shows up on the income statement, someone from headquarters is likely to come down here looking for some people to lay off.. I'm worried about something else too. What happens when sales are not up to expectations? Can we pull the "hat trick"? I'm sorry, I don't understand. Marvin's talking about something that happens fairly regularly. When sales are down and profits look like they are going to be lower than the president told the owners they were going to be, the president comes down here and asks us to deliver some more profits. And we pull them out of our hat. Yeah, we just increase production until we get the profits we want. I still don't understand. You mean you increase sales? Nope, we increase production. We're the production managers, not the sales managers. $221,000 www. t nces Marvin: J.: Pat: 3.: Pat: 3.: Required: look like they are going to be lower than the president told the owners they were going to be, the president comes down here and asks us to deliver some more profits. And we pull them out of our hat. Yeah, we just increase production until we get the profits we want. I still don't understand. You mean you increase sales? Nope, we increase production. We're the production managers, not the sales managers. I get it. Because you have produced more, the sales force has more units it can sell. Nope, the marketing people don't do a thing. We just build inventories and that does the trick. In all of the questions below, assume that the predetermined overhead rate under the traditional method is $26 per unit, and under the new capacity-based method it is $21.06 per unit 1. Assume actual sales is 76,000 units and the actual production in units, actual selling price, actual variable manufacturing cost per unit, and actual fixed costs all equal their respective budgeted amounts. Given these assumptions: a. Compute net operating income using the traditional income statement format. b. Compute net operating income using the new income statement format. 2. What effect does the new capacity-based approach have on the volatility of net operating income? 3. Assume that actual sales is 76,000 units and the actual selling price, actual variable manufacturing cost per unit, and actual fixed costs all equal their respective budgeted amounts. Under the traditional approach, how many units would have to be produced to realize net operating income of $221,000? 4. Assume that actual sales is 76,000 units and the actual selling price, actual variable manufacturing cost per unit, and actual fixed costs all equal their respective budgeted amounts. Under the new capacity-based approach, how many units would have to be produced to realize net operating income of $221.000? Req 1A Req 1B Req 2 Req 3 Req 4 Req 5 Req 6 Assume actual sales is 76,000 units and the actual production in units, actual selling price, actual variable manufacturing cost per unit, and actual fixed costs all equal their respective budgeted amounts. Given these assumptions: Compute net operating Income using the traditional income statement format. Sales Cost of goods sold: ces Vault Hard Drives, Incorporated Income Statement: Traditional Approach Variable manufacturing Manufacturing overhead applied. Gross margin Selling and administrative expenses Net operating income $ 76,000 0 76,000 S 76,000 Reg 1A Req 18 > ok Req 1A Req 1B Req 2 Req 3 Req 4 Req 5 Req 6 Assume actual sales is 76,000 units and the actual production in units, actual selling price, actual variable manufacturing cost per unit, and actual fixed costs all equal their respective budgeted amounts. Given these assumptions: Compute net operating income using the new income statement format. Sales Vault Hard Drives, Incorporated Income Statement: New Approach int Cost of goods sold: ences Variable manufacturing Manufacturing overhead applied. Gross margin Other expenses Cost of unused capacity Selling and administrative expenses Net operating income S 0 0 Complete this question by entering our answers in the tabs below. Req 1A Req 18 Req 2 Req 3 Req 4. Req 5 Req 6 What effect does the new capacity-based approach have on the volatility of net operating income? K Effect on net operating income is M nces Complete this question by entering your answers in the tabs below. Req 1A Req 18 Req 2 Req 3 Req 4 Req 5 Req 6 Assume that actual sales is 76,000 units and the actual selling price, actual variable manufacturing cost per unit, and actual fixed costs all equal their respective budgeted amounts. Under the traditional approach, how many units would have to be produced to realize net operating Income of $221,000? (Do not round your intermediate calculations and round your final answers to the nearest whole unit.) Traditional approach units < Req 2 Req 4 > Show less A Complete this question by entering your answers in the tabs below. Req 1A Req 1B Req 2 Req 3 Req 4 Req 5 Req 6 Assume that actual sales is 76,000 units and the actual selling price, actual variable manufacturing cost per unit, and actual fixed costs all equal their respective budgeted amounts. Under the new capacity-based approach, how many units would have to be produced to realize net operating income of $221,000? (Do not round your intermediate calculations and round your final answers to the nearest whole unit.) Show less A New approach units Complete this question by entering your answers in the tabs below. Req 1A. Req 1B Req 2 Req 3 Req 4 Req 5 Req 6 Will the "hat trick" be easier or harder to perform if the new capacity-based method is used? Performing hat trick will be 12 Complete this question by entering your answers in the tabs below. Req 1A Req 1B Req 2 Req 3 Req 4 Req 5 Req 6 Do you think the "hat trick" is ethical? Do you think the hat trick" is ethical? < Req 5 Req>