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 for $60 per unit. During 2017, it produced 60,000 units and sold 50,000 units (there was no beginning inventory or BI- 0). Costs per unit are: direct materials (DM) $15, direct labor (DL) $9, and variable overhead (VOH) $3. Fixed costs are: $720,000 (FOH) 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) S120,000 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 $12 of variable and s$ of fixed costs to produce one bathroom scale which normally sells for $35. A foreign wholesaler offers to purchase 2,000 scales at $15 each Kit Kat would incur special shipping costs of $1 per scale if the order were accepted. Kit Kat has sufficient unused (excess) capacity to produce the 2 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 ,000 scales. If the special order is 18. 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 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: A) Income would decrease by $4,000. B) Income would increase by $4,000. Income would increase by $70,000. Income would increase by $20,000. C) D) Page 4

Explanation / Answer

3 Variable costing Product cost Direct material 15.00 Direct labor 9.00 Variable manufacturing overhead 3.00 Variable manufacturing cost 27.00 Units manufactured 60000 Units sold 50,000 Income statement Sales revenue 3000000 Less Variable expense Variable manufacturing cost 1350000 Total variable expense 1350000 Contribution margin 1650000 Less Fixed cost Fixed manufacturing expense 720000 Fixed Marketing and Admin expense 90000 Total fixed expenses 810000 Net operating income 840000 1 Absorption costing Product cost Direct material 15.00 Direct labor 9.00 Variable manufacturing overhead 3.00 Fixed manufacturing (720000/60000) 12.00 Total product cost 39.00 Units produced 60000 Units sold 50,000 0 Income statement Sales revenue 3000000 cost of goods sold Beginning inventory 0 cost of goods manufactured 2340000 Add Goods available for sale 2340000 Ending inventory 390000 Less Cost of goods sold 1950000 Gross profit 1050000 Selling and admin expenses Less Variable marketing and admin expense Fixed marketing and selling expense 90000 Total Selling and admin expenses 90000 Net operating income 960000 Net operating income absorption costing 960000 Less Ending inventory Fixed manufacturing -120000 (10000*12) Net operating income variable costing 840000 15 Fixed cost in future 10000*12 120000 16 Correct answer is A 17 Selling price 15 Shipping cost -1 Variable cost -12 Net increase 2 Units 2000 Total amount 4000 Increase

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