EXERCISE 7-9 (20 MINUTES)

2. a. Year 1 Year 2 Year 3

Variable manufacturing cost... $ 2.00 $ 2.00 $ 2.00

Fixed manufacturing cost:

$480,000 ÷ 50,000 units... 9.60

$480,000 ÷ 60,000 units... 8.00

$480,000 ÷ 40,000 units... 12.00

Unit product cost ... $11.60 $10.00 $14.00

b. Variable costing net operating in-

come (loss)... $30,000 $(100,000) $ 30,000

Add (Deduct): Fixed manufactur-

ing overhead cost deferred in

inventory from Year 2 to Year 3

under absorption costing

(20,000 units × $8.00 per unit) ... 160,000 (160,000)

Add: Fixed manufacturing over-

head cost deferred in inventory

from Year 3 to the future under

absorption costing (10,000 units

× $12.00 per unit)... 120,000

Absorption costing net operating

income (loss) ... $30,000 $ 60,000 $ (10,000)