Electromix, Inc., manufactures and sells a unique electronic part. Operating res
ID: 2352440 • Letter: E
Question
Electromix, Inc., manufactures and sells a unique electronic part. Operating results for the first three years of activity were as follows (absorption costing basis):
Sales dropped by 20% during Year 2 due to the entry of several foreign competitors into the market. Electromix had expected sales to remain constant at 40,000 units for the year; production was set at 50,000 units in order to build a buffer of protection against unexpected spurts in demand. By the start of Year 3, management could see that spurts in demand were unlikely and that the inventory was excessive. To work off the excessive inventories, Electromix cut back production during Year 3, as shown below:
The companys plant is highly automated. Variable manufacturing costs (direct materials, direct labor, and variable manufacturing overhead) total only $4 per unit, and fixed manufacturing overhead costs total $600,000 per year.
Fixed manufacturing overhead costs are applied to units of product on the basis of each years production. That is, a new fixed overhead rate is computed each year.
Variable selling and administrative expenses are $4 per unit sold. Fixed selling and administrative expenses total $70,000 per year.
Electromixs management cant understand why profits increased during Year 2 when sales dropped by 20%, and why a loss was incurred during Year 3 when sales recovered to previous levels.
Prepare a contribution format variable costing income statement for each year. (Input all amounts as positive values except losses which should be indicated by a minus sign.)
Compute the unit product cost in each year under absorption costing. (Round your intermediate and final answers to 2 decimal places.)
Reconcile the variable costing and absorption costing net operating incomes for each year. (Leave no cells blank - be certain to enter "0" wherever required. Loss amounts and amounts to be deducted should be indicated with a minus sign. Round your intermediate calculations to 2 decimal places.)
If Lean Production had been in use during Year 2 and Year 3, and the predetermined overhead rate is based on 40,000 units per year, what would the companys net operating income (or loss) have been in each year under absorption costing?(Loss amounts should be indicated with a minus sign.)
Year 1 Year 2 Year 3 Sales $ 1,000,000 $ 800,000 $ 1,000,000 Cost of goods sold 760,000 512,000 788,500 Gross margin 240,000 288,000 211,500 Selling and administrative expenses 230,000 198,000 230,000 Net operating income (loss) $ 10,000 $ 90,000 $ (18,500)Explanation / Answer
2a. Unit product cost under absorption:
year 1: $19
year 2: $16
year 3: $22.75
2b. Reconcilitation
year 1
year 2
year 3
variable costing net income
10,000
-126,000
10,000
add (deduct) deferred year 2 MOH
0
216,000
187,500
add (deduct) deferred year 3 MOH
0
0
-216,000
absorption costing net income
10,000
90,000
-18,500
5b. Lean production
year 1
net operating income
10,000
year 2
net operating loss
126,000
year 3
net operating income
10,000
2b. Reconcilitation
year 1
year 2
year 3
variable costing net income
10,000
-126,000
10,000
add (deduct) deferred year 2 MOH
0
216,000
187,500
add (deduct) deferred year 3 MOH
0
0
-216,000
absorption costing net income
10,000
90,000
-18,500
5b. Lean production
year 1
net operating income
10,000
year 2
net operating loss
126,000
year 3
net operating income
10,000
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