Checl Diego Company manufactures one product that is sold for $70 per unit in tw

Question

Checl Diego Company manufactures one product that is sold for $70 per unit in two geographic regions-the East and West regions. The following information pertains to the company's first year of operations in which it produced 41,000 units and sold 36,000 units Variable costs per unit: Manufacturing: Direct naterials 20 Direct labor Variable manufacturing overhead Variable selling and administrative Fixed costs per year: Fixed manufacturing overhead Fixed selling and administrative expense $ 984,080 s 308,0oe The company sold 26,000 units in the East region and 10,000 units in the West region. It determined that $150,000 of its fixed selling and administrative expense is traceable to the West region, $100,000 is traceable to the East region, and the remaining $58,000 is a common fixed expense. The company will continue to incur the total amount of its fixed manufacturing overhead costs as long as it continues to produce any amount of its only product. 12 If the company produces 5.000 fewer units than it sells in its second year of operations, will absorption costing net operating income be higher or lower than variable costing net operating income in Year 2? Lower e Higher

Explanation / Answer

Answer is Lower. Explanation: Net Income under absorption costing is higher than net income under variable costing when the inventory level is more at the end as comapred to beginning inventory. When the units in inventory is less at the end as compared to beginning, then the net income under absorption costing is lower than net income under variable costing due to release of fixed manufacturing cost included in beginning inventory.

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