Questions to answer

Anwers to questions 1-8

Instructions Answer each question independently based on the original data unless instructed otherwise. You do not need to prepare a segmented income statement until question 13. Eye Glass manufactures one product that is sold for $80 per unit in two geographic regions, the East and West regions. The following information pertains to the company's first year of operations in which it produced 40.000 units and sold 35,000 units. $24 $14 Verable costs per unit Manufacturing: Direct materias Direct labor Variable manufacturing overhead Variable selling and administrative Feed costs per year Fixed manufacturing overhead Fixed selling and administrative open 54 $800,000 $496,000 The company sold 25,000 umits in the East region and 10,000 units in the West region It determined that $250,000 of its fixed selling and acim.inistrative expenses is traceable to the West region, $150,000 is traceable to the East region, and the remaining $96.000 is a common fised cost. The company will continue to incur the total amount of its fixed manufacturing overhead costs as long as it continues to produce any amount of its only product 9. If the sales volumes in the East and West regions had been reversed, what would be the company's overall brenk-even point in unit sales? 10. What would have been the company's variable costing net operating income if it had produced and sold 35,000 units? You do not need to perform any calculations to answer this question 11. What would have been the company's absorption costing net operating income if it had produced and sold 35,000 units? You do not need to perform any calculations to answer this question 12. If the company produces 5,000 fewer units than it sells in its second year of operations, will absorption costing net operating income be higher or lower than variable costing net operating income in Year 2? Why? No calculations are necessary 1) Calculation of Unit product cost under Variable costing Direct materials $24 Direct labor 14 Variable manufacturing overhead 2. Unit product cost under variable costing $40 Unit product cost under variable costing $40 2) Calculation of Unit product cost under Absorption costing Direct materials $24 Direct labor 14 Variable manufacturing overhead 2 Fixed manufacturing overhead (800,000/40,000) 20 Unit product cost under absorption costing $60 Unit product cost under absorption costing $60 3) Calculation of Contribution margin under Variable costing Sales (35,000 $80) $2.800,000 Less: Variable expenses: 1,400,000 Variable cost of goods sold (35,000 $40) Variable selling and administrative expenses (35,000 $4) 140,000 1.540,000 Contribution margin $1,260,000 Contribution margin SI 260,000 4) Calculation of Operating income (loss) under Variable costing Fixed expenses Fixed manufacturing overhead-Fixed selling and administrative expenses = $800,000-496,000 = $1.296,000 Net operating incomerlossj= Contribution margin-Fixed expenses = $1.260,000-1.296,000 = $-36.000 Net operating incomellose) S-36.000 5 Gross Margin under absorption costing: Sales Revenue (35,000 units sold X $80 per unit) Cost of Goods Produced (40,000 units produced x $60 per unit) Less: Ending Inventory of Finished Goods (5,000 units X $60) Less: Cost of Goods Sold Gross Margin $28,00,000 $24,00,000 -$3,00,000 -$21,00,000 $7,00,000 6 Net Operating Income under absorption costing $7,00,000 -$1,40,000 Gross Margin (as above) Less: Variable Selling and administrative expenses (35,000 units X $4 per units) Less: Fixed Selling and administrative expenses Net Operating Income/(Loss) -$4,96,000 $64,000 7 Difference in Net operating Income under variable costing and absorption costing: Net Operating Income/(Loss) under variable costing Net Operating Income/(Loss) under absorption costing Difference in Net operating Income under variable costing and absorption costing -$36,000 $64,000 $1,00,000 $1,00,000 The difference is due to following: Fixed Manufacturing cost is included in Ending Inventory under absorption costing and therefore, cost is passed on to next period. Under variable costing Fixed Manufacturing Cost is charged in the year it is incurred. (5,000 unit ending inventory x $20 per unit fixed manufacturing cost) Contribution Margin per unit = Selling Prince per unit - Variable Cost per unit Contribution Margin per unit = $80 - ($24 + $14 + $2 + $4) = $80 - $44 Contribution Margin per unit = $36 Break Even Point in Units = Fixed Cost / Contribution Margin per unit Break Even Point in Units = ($8,00,000+ $4,96,000) / $36 Break Even Point in Units = $12,96,000 / $36 Break Even Point in Units = 36,000 units 8 Break Even Point is higher than actual sales by 1,000 units. Even though actual units sold in (6) are lesser by 1,000 units than break even point, there is profit under absorption costing. This is because fixed manufacturing cost included in ending inventory are passed on to next period. Instructions Answer each question independently based on the original data unless instructed otherwise. You do not need to prepare a segmented income statement until question 13. Eye Glass manufactures one product that is sold for $80 per unit in two geographic regions, the East and West regions. The following information pertains to the company's first year of operations in which it produced 40.000 units and sold 35,000 units. $24 $14 Verable costs per unit Manufacturing: Direct materias Direct labor Variable manufacturing overhead Variable selling and administrative Feed costs per year Fixed manufacturing overhead Fixed selling and administrative open 54 $800,000 $496,000 The company sold 25,000 umits in the East region and 10,000 units in the West region It determined that $250,000 of its fixed selling and acim.inistrative expenses is traceable to the West region, $150,000 is traceable to the East region, and the remaining $96.000 is a common fised cost. The company will continue to incur the total amount of its fixed manufacturing overhead costs as long as it continues to produce any amount of its only product 9. If the sales volumes in the East and West regions had been reversed, what would be the company's overall brenk-even point in unit sales? 10. What would have been the company's variable costing net operating income if it had produced and sold 35,000 units? You do not need to perform any calculations to answer this question 11. What would have been the company's absorption costing net operating income if it had produced and sold 35,000 units? You do not need to perform any calculations to answer this question 12. If the company produces 5,000 fewer units than it sells in its second year of operations, will absorption costing net operating income be higher or lower than variable costing net operating income in Year 2? Why? No calculations are necessary 1) Calculation of Unit product cost under Variable costing Direct materials $24 Direct labor 14 Variable manufacturing overhead 2. Unit product cost under variable costing $40 Unit product cost under variable costing $40 2) Calculation of Unit product cost under Absorption costing Direct materials $24 Direct labor 14 Variable manufacturing overhead 2 Fixed manufacturing overhead (800,000/40,000) 20 Unit product cost under absorption costing $60 Unit product cost under absorption costing $60 3) Calculation of Contribution margin under Variable costing Sales (35,000 $80) $2.800,000 Less: Variable expenses: 1,400,000 Variable cost of goods sold (35,000 $40) Variable selling and administrative expenses (35,000 $4) 140,000 1.540,000 Contribution margin $1,260,000 Contribution margin SI 260,000 4) Calculation of Operating income (loss) under Variable costing Fixed expenses Fixed manufacturing overhead-Fixed selling and administrative expenses = $800,000-496,000 = $1.296,000 Net operating incomerlossj= Contribution margin-Fixed expenses = $1.260,000-1.296,000 = $-36.000 Net operating incomellose) S-36.000 5 Gross Margin under absorption costing: Sales Revenue (35,000 units sold X $80 per unit) Cost of Goods Produced (40,000 units produced x $60 per unit) Less: Ending Inventory of Finished Goods (5,000 units X $60) Less: Cost of Goods Sold Gross Margin $28,00,000 $24,00,000 -$3,00,000 -$21,00,000 $7,00,000 6 Net Operating Income under absorption costing $7,00,000 -$1,40,000 Gross Margin (as above) Less: Variable Selling and administrative expenses (35,000 units X $4 per units) Less: Fixed Selling and administrative expenses Net Operating Income/(Loss) -$4,96,000 $64,000 7 Difference in Net operating Income under variable costing and absorption costing: Net Operating Income/(Loss) under variable costing Net Operating Income/(Loss) under absorption costing Difference in Net operating Income under variable costing and absorption costing -$36,000 $64,000 $1,00,000 $1,00,000 The difference is due to following: Fixed Manufacturing cost is included in Ending Inventory under absorption costing and therefore, cost is passed on to next period. Under variable costing Fixed Manufacturing Cost is charged in the year it is incurred. (5,000 unit ending inventory x $20 per unit fixed manufacturing cost) Contribution Margin per unit = Selling Prince per unit - Variable Cost per unit Contribution Margin per unit = $80 - ($24 + $14 + $2 + $4) = $80 - $44 Contribution Margin per unit = $36 Break Even Point in Units = Fixed Cost / Contribution Margin per unit Break Even Point in Units = ($8,00,000+ $4,96,000) / $36 Break Even Point in Units = $12,96,000 / $36 Break Even Point in Units = 36,000 units 8 Break Even Point is higher than actual sales by 1,000 units. Even though actual units sold in (6) are lesser by 1,000 units than break even point, there is profit under absorption costing. This is because fixed manufacturing cost included in ending inventory are passed on to next period