Electromix, Inc., manufactures and sells a unique electronic part. Operating res
ID: 2352649 • 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 company
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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