Starfax, Ihc. anufactures a small part that is widely used in varicus electronic

Question

Starfax, Ihc. anufactures a small part that is widely used in varicus electronic products such as home computers Operating results for the first hreo yeers of actvity were as follows (aboorption costing basis Yorr 2 S 800.00020.000 00,000 Sales Cost of goods sold Seling and dsaive espenses Net ope ating income (loes the lattor part of Yaar 2, a oor e tor wone out of busness and in the process cump d a largo un bor o un s on the a at As a rDGut. Sta ars SalOG dropped by 10% durr g Yoar 2 o en ough production increased du ng ta oar. Manager om had DpOC ed Sal s to uman oon tant at 4 000 units; the ncreased production was des ed to 10 de the Dompan with a bu er o protecton a inst unexpected spuns n demand. B the start of Year mana ement cu see hat inve mr nas cess va and that spuns in der and wes u e y To leduce he excessiva inventories, Sta a back production du Year 3 as own bdow Production in units Sales in unts 5 40,000 S 45,000 36,000 Addiionel information about the company follows a. The company's plant is highly automated. Variable manufacturing expenses (drect materias, direct labor, and variabile manudacturing cverhead) total enly $2 50 per unt and foed manulacturing everhead expenses sotal $540,000 per year b Fwed mar utsturg overheed oosts are appied to units of product on the b839 of each year's product on That 8. , new fo ed maru cturrg overteed rete ® computed each year c. Varable selng and adminisrative expenses wore $2 per unit sold in each year. Fixed selling and administrative expenses totaled $00,000 per year d. The compeny u3es a FIFO inventory fowr asoumption Starfax s erteger ent can't undersend hy profits more th8 dubled dur weer 2 her s8les 0pped by 10% and why 8 Iss incurred during Yeer 3 her sales eco ered to prev ous levefs Required: . Preparo a contributon format varablo costing incame statement for oach year. Variable Costing Income Statement Total vatable expenses Tola faed expenses Net operaoing incomo 0oas)

Explanation / Answer

1) Year 1 Year 2 Year 3 Units 40,000 36,000 40,000 Sales $800,000 $720,000 $800,000 Variable Expenses: Variable Cost of goods sold @ $2.50 per unit $100,000 $90,000 $100,000 Variable selling and administrative @ $2 per unit $80,000 $72,000 $80,000 Total variable expenses $180,000 $162,000 $180,000 Contribution margin $620,000 $558,000 $620,000 Fixed expenses: Fixed manufacturing overhead $540,000 $540,000 $540,000 Fixed Selling and administrative expenses $60,000 $60,000 $60,000 Total fixed expenses $600,000 $600,000 $600,000 Net operating income (loss) $20,000 -$42,000 $20,000 2a Unit product cost in each year under absorption costing. Units 40,000 45,000 36,000 Variable Manufacturing Cost $2.5 $2.5 $2.5 Fixed Manufacturing Cost = $540,000/units 13.5 12 15 Unit product Cost $16 $14.5 $17.5 2b Variable costing net operating income (loss) $20,000 -$42,000 $20,000 Add (Deduct): Fixed manufacturing overhead cost deferred in inventory from Year 2 to Year 3 under absorption costing (9,000 units × $12.00 per unit) $108,000 -$108,000 Add: Fixed manufacturing overhead cost deferred in inventory from Year 3 to the future under absorption costing (5,000 units × $15 per unit) $75,000 Absorption costing net operating income (loss) $20,000 $66,000 -$13,000 5b Year 1 Year 2 Year 3 Sales $800,000 $720,000 $800,000 Less: Cost of Good Sold Cost of goods manufactured @ $16 per unit $640,000.00 $576,000.00 $640,000.00 underapplied overhead (40000-36000) x$13.5 $54,000.00 Cost of goods sold $640,000.00 $630,000.00 $640,000.00 Gross Profit $160,000.00 $90,000.00 $160,000.00 Less : selling and administra-tive expenses $140,000.00 $132,000.00 $140,000.00 Net operating income (loss) $20,000.00 -$42,000.00 $20,000.00

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