If Lean production has been in use during 2020 and 2021, and the pre-determined overhead absorption rate is based on 40,000 units per year, compute the company’s net operating income/(loss) for each year under absorption costing. Explain the reason for any differences between these income figures and those reported using variable costing. Justify your explanation with a brief computation.
If Lean production has been in use during 2020 and 2021, and the pre-determined overhead absorption rate is based on 40,000 units per year, compute the company’s net operating income/(loss) for each year under absorption costing. Explain the reason for any differences between these income figures and those reported using variable costing. Justify your explanation with a brief computation.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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If Lean production has been in use during 2020 and 2021, and the pre-determined
Transcribed Image Text:Alpha Electronics Cop (AEC) manufactures and sells a unique intermediate component part
that is widely used in various household electronic products. Operating results for the latest
three financial years were as follows:
Table 1
2019
2020
2021
Sales
$1,000,000
S800,000 $1,000,000
Cost of goods sold
760,000
512.000
788,500
Gross margin
Selling and administrative expenses
240,000
288,000
211,500
198.000
$90.000
230.000
230,000
Net operating income / (loss)
$10.000
$(18.500)
As the industry matures, the company is facing stiff competition from several regional players.
Sales dropped 20% during 2020, against an original expectation of 40,000 units. Production
for 2020 was budgeted at 50,000 units so as to build a sufficient buffer to prevent any stock-
out situation from unexpected demand surge.
The excess stocks from 2020 was carried over into 2021, and accordingly the budgeted
production for 2021 was cut.
2019
2020
2021
Production in units
40,000
50,000
32,000
Sales in units
40,000
32,000
40,000
There are the following additional information about the AEC:
Fixed manufacturing overhead costs
Fixed selling and administrative costs
Variable costs per unit:
Manufacturing cost
Selling and administrative cost
$600,000 per annum
$70,000 per annum
$4
$4
The fixed manufacturing overhead costs are applied to units of production on
the basis of actual production for the year.
The company uses the FIFO inventory flow assumption.
There were no opening inventories for 2019.
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