Question

Schoolastic Corporation has provided the following data for its two most recent years of operation:

Selling price per unit	$ 71
Manufacturing costs:
Variable manufacturing cost per unit produced:
Direct materials	$ 12
Direct labor	$ 6
Variable manufacturing overhead	$ 3
Fixed manufacturing overhead per year	$264,000
Selling and administrative expenses:
Variable selling and administrative expense per unit sold	$ 4
Fixed selling and administrative expense per year	$ 74,000

	Year 1	Year 2
Units in beginning inventory	0	3,000
Units produced during the year	11,000	12,000
Units sold during the year	8,000	14,000
Units in ending inventory	3,000	1,000

The net operating income (loss) under absorption costing in Year 1 is closest to:

Multiple Choice

• $208,000

• $176,000

• $30,000

• $102,000

Answer 1

Schoolastic Corporation
Absorption Costing Income Statement
Sales (8,000 x 71)		$568,000
Cost of goods sold:
Direct materials (11,000 x 12)	132,000
Direct labor ( 11,000 x 6)	66,000
Variable manufacturing overhead (11,000 x 3)	33,000
Fixed manufacturing overhead	264,000
Cost of goods manufactured	495,000
Ending inventory ( 495,000 x 3,000/11,000)	-135,000
Cost of goods sold		-360,000
Gross margin		$208,000
Operating expenses:
Variable selling and administrative expense ( 8,000 x 4)	32,000
Fixed selling and administrative expense	74,000
Total operating expense		-106,000
Net Operating Income		$102,000

The net operating income under absorption costing in Year 1 is closest to: $102,000

Fourth option is correct.