24 Arrow .kahanoperation mandelaares thwe \"hemicals (TN40. Nuss-and nKUI \"om \

Question

24 Arrow .kahanoperation mandelaares thwe "hemicals (TN40. Nuss-and nKUI "om "joit Pusu The a d om at the split-off point. They can eithar be sold at that point or processed " as follows ts releed to each batch of this chemical process $3,000 Sales value at split-off point Allocaled joint costs Sales value afler further processing Cost of farther processing $12,000 56,000$6,000 $6,000 $20,000$18,000 9,000 $5,000 $3,000 $2,000 516,000 Far which produces) above would it be more profitable for more profitable for Arrow to sell after further processing rather than at the to split-off point? A. TM40 only B NJSS only C BK13 only All of them NJSS and BK13 too 25 Two years ago, B. Bernanke started a company to manufacture and sell speciaty socks. Below are her selected actual operating results for the first two years of operations (her cost structure and Year I and Year 2). She allocates her fixed manufacturing overhead costs year selling prices were the same in to the number of units produced in each Units Units sold 31,00 34,000 28,00 ing net operating incoms (NOI) S 44,000 S 35,O Fixed selling& admin, expense What was the net operating income under absorption costing for Year 2? A. $35,000 B. $44,000 C $56,000 D. $65,000 E. None of the above Page 14 of 14

Explanation / Answer

24. Option E is correct:

25. Option C. is correct

The difference in year 1 in net operating income under absorption costing and variable costing is because under absortion costing fixed costs are capitalised with inventory.

Hence the difference in profit= 44000-35000= 9000 is allocable to the unsold inventory fixed costs, unsold inventory= 31000-28000= 3000, hence fixed costs per unit= 9000/3000= 3 per unit. and total fixed costs= 31000*3= 93000

in year 1 contribution towards fixed costs and profit from sales= total fixed costs+profit under variable costing= 12000+93000+47000= 140000

hence contribution per unit= 140000/28000= 5 per unit

since contribution will not change under both methods even in year 2 contribution per unit= 5

total contribution= 34000*5= 170000

fixed costs under absorption costing= units sold* fixed cost per unit= 34000*3= 102000

fixed selling expenses=12000

net profit= 170000-102000-12000= 56000

TM40 N355 BK13 A Incremental revenue at split off: Sales revenue 16,000 12000 5000 B Net realisable value with further processing: Particulars Amount Amount Amount Sales revenue                20,000 18000 9000 Less: further processing costs                  5,000 3000 2000 Net realisable value                15,000                15,000                  7,000 C=B-A Advantage/(disadvantage) of further processing                (1,000)                  3,000                  2,000 Further process No Yes Yes

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