Answered

Assume the following information for a company that produced and sold 10,000 units during its first year of operations:

\begin{tabular}{lrr}
& Per Unit & Per Year \\
Selling price & \[tex]$200 & \\
Direct materials & \$[/tex]84 & \\
Direct labor & \[tex]$50 & \\
Variable manufacturing overhead & \$[/tex]12 & \\
Sales commission & \[tex]$8 & \\
Fixed manufacturing overhead & & \$[/tex]300,000 \\
\end{tabular}

Using absorption costing, what is the company's net operating income?



Answer :

GinnyAnswer
To find the company's net operating income using absorption costing, we'll go through a detailed, step-by-step calculation based on the given data. Absorption costing includes all manufacturing costs (both fixed and variable) in the cost of goods sold, and we'll follow the steps to compute this as follows:

### Step 1: Calculate Total Sales
First, we calculate the total sales revenue:
[tex]\[ \text{Total Sales} = \text{Units Sold} \times \text{Selling Price per Unit} \][/tex]

[tex]\[ \text{Total Sales} = 10,000 \times \$200 = \$2,000,000 \][/tex]

### Step 2: Calculate Total Direct Materials Cost
Next, we calculate the total cost for direct materials:
[tex]\[ \text{Total Direct Materials} = \text{Units Sold} \times \text{Direct Materials per Unit} \][/tex]

[tex]\[ \text{Total Direct Materials} = 10,000 \times \$84 = \$840,000 \][/tex]

### Step 3: Calculate Total Direct Labor Cost
Then, we calculate the total direct labor cost:
[tex]\[ \text{Total Direct Labor} = \text{Units Sold} \times \text{Direct Labor per Unit} \][/tex]

[tex]\[ \text{Total Direct Labor} = 10,000 \times \$50 = \$500,000 \][/tex]

### Step 4: Calculate Total Variable Manufacturing Overhead
We calculate the total variable manufacturing overhead cost:
[tex]\[ \text{Total Variable Manufacturing Overhead} = \text{Units Sold} \times \text{Variable Manufacturing Overhead per Unit} \][/tex]

[tex]\[ \text{Total Variable Manufacturing Overhead} = 10,000 \times \$12 = \$120,000 \][/tex]

### Step 5: Calculate Total Sales Commissions
Next, we calculate the total sales commissions:
[tex]\[ \text{Total Sales Commissions} = \text{Units Sold} \times \text{Sales Commission per Unit} \][/tex]

[tex]\[ \text{Total Sales Commissions} = 10,000 \times \$8 = \$80,000 \][/tex]

### Step 6: Calculate Total Variable Costs
We calculate the total variable costs, which include direct materials, direct labor, variable manufacturing overhead, and sales commissions:
[tex]\[ \text{Total Variable Costs} = \text{Total Direct Materials} + \text{Total Direct Labor} + \text{Total Variable Manufacturing Overhead} + \text{Total Sales Commissions} \][/tex]

[tex]\[ \text{Total Variable Costs} = \$840,000 + \$500,000 + \$120,000 + \$80,000 = \$1,540,000 \][/tex]

### Step 7: Calculate Total Manufacturing Overhead
To calculate the total manufacturing overhead, we add the fixed manufacturing overhead to the total variable manufacturing overhead:
[tex]\[ \text{Total Manufacturing Overhead} = \text{Fixed Manufacturing Overhead} + \text{Total Variable Manufacturing Overhead} \][/tex]

[tex]\[ \text{Total Manufacturing Overhead} = \$300,000 + \$120,000 = \$420,000 \][/tex]

### Step 8: Calculate Total Cost of Goods Sold (COGS)
The total cost of goods sold (COGS) includes direct materials, direct labor, and total manufacturing overhead:
[tex]\[ \text{Total COGS} = \text{Total Direct Materials} + \text{Total Direct Labor} + \text{Total Manufacturing Overhead} \][/tex]

[tex]\[ \text{Total COGS} = \$840,000 + \$500,000 + \$420,000 = \$1,760,000 \][/tex]

### Step 9: Calculate Net Operating Income
Finally, we calculate the net operating income by subtracting total variable costs and total cost of goods sold from total sales:
[tex]\[ \text{Net Operating Income} = \text{Total Sales} - \text{Total Variable Costs} - \text{Total COGS} \][/tex]

[tex]\[ \text{Net Operating Income} = \$2,000,000 - \$1,540,000 - \$1,760,000 = -\$1,300,000 \][/tex]

### Result
The company's net operating income using absorption costing is:
[tex]\[ \boxed{-\$1,300,000} \][/tex]