Use the following to answer question 15: Befuddled But Brilliant Old Professor M

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Use the following to answer question 15: Befuddled But Brilliant Old Professor Mullen's Gourmet Food Company sells its product per unit. During 2017, it produced 60,000 units and sold 50,000 units (there was no beginning for $60 inventory or BI-0). Costs per unit are: direct materials (DM) $15, direct labor (DL) $9, and variable o VOI) S3. Fixed costs are: 720,00 FOED manufacturing overhead, and $90,000 (S&A;) selling and administrative expenses. 15. Under absorption costing (ABS), what amount of fixed overhead (FOH) is deferred to a future period? A) $30,000 B) $120,000 C) $150,000 D) $720,000 16. Net income under absorption costing is higher than net income under variable costing A) when units produced (P) exceed units sold (S). B) when units produced (P) equal units sold (S). C) when units produced (P) are less than units sold (S). D) regardless of the relationship between units produced (P) and units sold (S) 17. It costs Kit Kat Company $12 of variable and $5 of fixed costs to produce one bathroom scale which normally sells for $35. A foreign wholesaler offers to purchase 2,000 scales at sis ca ar would incur special shipping costs of SI per scale if the order were accepted. Kit Kat has sufficient unused (exeess) capacity to produce the 2,000 scales. If the special order is accepted, what will be the effect on net income? A) $4,000 increase B) $4,000 decrease C) $6,000 decrease D) $30,000 increase Bow-wow Company manufactures a product with a unit variable cost of $50 and a unit sales price of $88. Fixed manufacturing costs were $240,000 when 10,000 units were produced and 18. sold. The company has a one-time opportunity to sell an additional 1,000 units at $70 each in a foreign market which would not affect its present sales. If the company has sufficient (excess) capacity to produce the additional units, acceptance of the special order would affect net income as follows: Income would decrease by $4,000. A) B) Income would increase by $4,000. C) Income would increase by $70,000 D) Income would increase by $20,000 Page 4

Explanation / Answer

Answer 15

B . $120,000

Explanation : Amount of Fixed ovehead deffered to future period

= (Fixed manufactring ovehead / No. of units produced ) * Units in Ending inventory

= ($720,000 / 60,000 units ) * [60,000 units - 50,000 units] = $12 * 10,000 units = $120,000

Answer 16

A) When units Produced exceeds the units sold

Explanation : Under variable costing fixed manufactring ovehead is fully charged to income statement irrespective of units produced or sold. Bur under absorption costing , fixed manufactring ovehead only for units sold is charged to income statement & remaing fixed manufactring ovehead is a part of ending inventory which deffered to future period .

Thus when units produced are more than units sold that indicates under absorption costing , fixed manufactring ovehead is charged to income statement less than under variable costing , resulting in higher income under absorption costing.

Answer 17

B. Income would increase by $4,000

Explanation :

Note : For determining profitability under special order , regular fixed cost are not relevant & thus not consider in the computation.

Total varible cost per unit for special order = Variable cost for production + Shipping cost = $12 + $1 = $13

Total Profit under special order = (Selling Price - Variable cost ) * units in special order

= ($15-$13) * 2,000 units = $4,000

Thus, if special order is accepted , net income would increase by $4,000

Answer 18

D. Income would increase by $20,000

Explanation :

Note : For determining profitability under special order , regular fixed cost are not relevant & thus not consider in the computation.

Total Profit under special order = (Selling Price - Variable cost ) * units in special order

= ($70 - $50) * 1,000 units = $20,000

Thus, if special order is accepted , net income would increase by $20,000

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