PLEASE SHOW FULL WORKING ON HOW YOU GET THE ANSWER. ESPECIALLY HOW TO FIND MANUF

Question

PLEASE SHOW FULL WORKING ON HOW YOU GET THE ANSWER. ESPECIALLY HOW TO FIND MANUFACTURING OVERHEAD COST PER UNIT TO SOLVE THE QUESTION.

Two years ago, Louise Wilow started a company to manufacture and sell cell phone her selected actual operating results for the first two years of operations (her cost structure and selling prices were the same in Year 1 and Year 2). She allocates her fixed manufacturing overhead costs to the number of units produced in each year ries. Below are Year l 45.000 42.000 Year 45.000 46,000 Units produced Units sold A bsorption costing net operating income (NOI) Variable costing NO Fixed selling & admin. expense S 63.000S 79.00 S 15.000 S 15,000 What was the absorption costing net operating income in Year 1? $79,000 $69.000 $77.000 $90,000 A. B. C. D.

Explanation / Answer

We are given net operating incomes under variable costing method as 63000 ( year 1) and 79000 ( year2)

also we are given units sold as 42000 ( year 1) and 46000 (year 2)

Under Variable costing overheads are absorbed at full amount seperately and not as per unit cost as in absorprion costing

we can calculate contribution margin under variable costing as

= Change in profits / change in units sold

= (79000 - 63000) / (46000 - 42000)

= 16000 / 4000

= 4

Now arranging the data we can obtain our fixed manufacturing cost as

Contribution margin

( 90000 / 45000, = 2 per unit)

Under absorption costing fixed cost forms part of cost of goods sold and is subtracted proportionately on units sold

Now, Contribution margin was 4

fixed manufacturing overhead per unit = 2

Earnings after fixed manufacturing cost per unit = 4 - 2 , = 2

Total earnings for year 1 = 42000 units x 2

= 84000

Less: selling and administrative expense = 15000

Net operating income under absorptioon costing = 84000-15000

= 69000 option B

Under absorption costing remaining 6000 of fixed overhead will form part of closing stock of 3000 units

Year 1 Year 2 Contribution margin, = 42000 x 4 168000            = 46000 x 4 184000 Less: Selling and administrative cost 15000 15000 Less: net operating income 63000 79000 = Fixed manufacturing costs 90000 90000

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