Luzadis Company makes furniture using the latest automated technology. The company uses a job-order costing system and applies manufacturing overhead costs to products on the basis of machine hours. The following estimate was used in preparing the predetermined overhead rate at the beginning of the year.

Machine -hours 75,000

Fixed manufacturing overhead costs $795,000

Variable manufacturing overhead per computer -hour $1.40

During the year, a glut of furniture on the market resulted in cutting back production and a buildup of furniture in the company's warehouse. The company's cost records revealed the following actual cost and operating data for the year.

Machine-hours 60,000 Manufacturing overhead costs $850,000 Inventories at year-end: Raw materials $30,000 Work in process (includes overhead applied of $36,000) $100,000 Finished goods (includes overhead applied of $180,000) $500,000 Cost of goods sold (includes overhead applied of $504,000) $1,400,000 Required:

1. Compute the company's predetermined overhead rate 2. Compute the underapplied or overapplied overhead. 3. Assume that the company closes any underapplied or overapplied overhead to Cost of Goods Sold. Prepare the appropriate journal entry. 4. Assume that the company allocates any underapplied or overapplied overhead proportionally to Work in Process, Finished Goods, and Cost of Goods Sold. Prepare the appropriate journal entry. 5. How much higher or lower will net operating income be if the underapplied or overapplied overhead is allocated to Work in Process, Finished Goods, and Cost of Goods Sold rather than being closed to Cost of Goods Sold?

T