EXERCISE 3-17 (30 MINUTES)

3. Net operating income is more volatile under the new method than under

the old method. The reason for this is that the reported profit per unit

sold is higher under the new method by $5, the difference in the prede-

termined overhead rates. As a consequence, swings in sales in either di-

rection will have a more dramatic impact on reported profits under the

new method.