Integration Exercise 3 Absorption Costing, Variable Costing, Cost-Volume-Profit-Relationships [LO 5-4, LO 5-5, LO 5-7, LO 6-1, LO 6-2]

Newton Company manufactures and sells one product. The company assembled the following projections for its first year of operations:

Variable costs per unit:
Manufacturing:
Direct materials	$	20
Direct labor	$	16
Variable manufacturing overhead	$	4
Variable selling and administrative	$	2
Fixed costs per year:
Fixed manufacturing overhead	$	450,000
Fixed selling and administrative expenses	$	70,000

During its first year of operations Newton expects to produce 25,000 units and sell 20,000 units. The budgeted selling price of the companys only product is $66 per unit.

Required:

(answer each question independently by referring to the original data):

1. Assuming that Newtons projections are accurate, what will be its absorption costing net operating income (loss) in its first year of operations?

2. Newton is considering investing in a higher quality raw material that will increase its direct materials cost by $1 per unit. It estimates that the higher quality raw material will increase sales by 1,000 units. What will be the companys revised absorption costing net operating income (loss) if it invests in the higher quality raw material and continues to produce 25,000 units?

3. Newton is considering raising its selling price by $1.00 per unit with an expectation that it will lower unit sales by 1,500 units. What will be the companys revised absorption costing net operating income (loss) if it raises its price by $1.00 and continues to produce 25,000 units?

4. Assuming that Newtons projections are accurate, what will be its variable costing net operating income (loss) in its first year of operations?

5. Newton is considering investing in a higher quality raw material that will increase its direct materials cost by $1 per unit. It estimates that the higher quality raw material will increase sales by 1,000 units. What will be the companys revised variable costing net operating income (loss) if it invests in the higher quality raw material and continues to produce 25,000 units?

6. Newton is considering raising its selling price by $1.00 per unit with an expectation that it will lower unit sales by 1,500 units. What will be the companys revised variable costing net operating income (loss) if it raises its price by $1.00 and continues to produce 25,000 units?

7. What is Newtons break-even point in unit sales? What is its break-even point in dollar sales?

8. What is the companys projected margin of safety in its first year of operations?