Home Products Inc has failed to reach its planned activity level operation. The

Question

Home Products Inc has failed to reach its planned activity level operation. The following table shows the relationship between units produc normal activity for these years and t have remained the same for the last two years and are expected to do so in Year 3. Income has been positive in both Year 1 and Year 2. i during its first two years of ed, sales, and he projected relationship for Year 3. All prices and costs Units Year 1 Year 2 Year 3 Produced Sales 90,000 90,00 95,000 95,00 95,00 90,00 Planned Production 100,000 00,000 Because Home Products uses a full costing system, one would predict operating income f Year 3 to be: O Greater than operating income under variable costing. O Less than year 2. O The same as operating income under varfable costing. O Less than the operating income under variable costing.

Explanation / Answer

Because Home Products uses a full costing system, one would predict operating income for Year 3 to be:

Answer - Greater than operating income under variable costing.

This is because the inventory is left and the fixed costs absorbed will be less thus profit will be higher under full costing.

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