QUESTION 3 Bneik Nordin, president of Strong String Company is surprised at the performance of his company "We sold the same rumber of units this year as we did last year, yet our profits have more than doubled. There must be something wrong with our accounting system or the people managing it?" The statements to which En. Nordin was referring are shown below (absorption costing basis) Year 1 Year 2 Sales (20,000 units each year) . .. RM 700,000 RM 700,000 460,000 400,000 Gross margin 240,000 300,000 Selling and administrative expenses 200,000 200,000 Net operating income. RM 40,000 RM 100,000 The statements above show the results of the first two years of operation. In the first year, the company produced and sold 20,000 units; in the second year, the company again sold 20,000 units, but it increased production as shown below Year 2 Year 1 20,000 25,000 Production in units 20,000 20,000 Sales in units RM 8 RM8 Variable manufacturing cost per unit produced RM 1 Variable selling and administrative expense per unit sold RM1 RM 300,000 RM 300,000 Fixed manufacturing overhead costs (total) StrongString Company applies fixed manufacturing overhead costs to its only product on the basis of each year's production. Thus, a new fixed manufacturing overhead rate is computed each year Reguired a) Compute the unit product cost for each year under i. Absorption costing. i. Variable costing. 4 marks) 13 b) Prepare a contribution format variable costing income statement for each year (6 marks) c) Reconcile the variable costing and absorption costing net operating income figures for each year (2 marks) d) Explain to the president why, under absorption costing, the net operating income for Year 2 was higher than the net operating income for Year 1, although the same number of units was sold in each year. 4 marks) e) If Lean Production had been used during Year 2, what would the company's net operating income have been under absorption costing? Explain the reason for any difference between this income figure and the figure reported by the company in the statements above 4 marks) D How does lean Production reduce or eliminate the difference in reported net operating income between absorption and variable costing? (5 marks) Total 25 marks