Strategic Cost Management Problem 4 (Prepare and Interpret Statements; Changes in Both Sales andProduction; JIT)Nemo, Inc. manufactures and sells a unique electronic part. Operating resultsfor the first three years of activity were as follows (absorption costing basis):Year 3P800,000. P1.000,000Year 1Year 2P1,000,000SalesCost of goods sold:Beginring inventory.Add cost of goods manufacturedGoods available for sale.Less ending inventory.Cost of goods sold.Gross marginLess selling and administrative expenses.Net operating income (loss).840,000840,000280,000560,000240,00150,000P 90,000280,000760,0001,040,000190,000850,000150,000170,000P (20,000)800,000800,000800,000200,000170,000P 30,000Sales dropped by 20% during Year 2 due to the entry of several foreigncompetitors into the market. Nemo had expected sales to remain constant at50,000 units for the year, production was set at 60,000 units in order to builda buffer of protection against unexpected spurts in demand. By the start ofYear 3, management could see that spurts in demand were unlikely and that the inventory was excessive. To work off the excessive inventories, Nemo cutback production during Year 3, as shown below:Year 150,00050,000Year 260,00040,000Year 340,00050,000Production in unitsSales in units.Additional information about the company follows:a. The company's plant is highly automated. Variable manufacturing costs(direct materials, direct labor, and variable manufacturing overhead) totalonly P4 per unit, and fixed manufacturing costs total P600,000 per year.b. Fixed manufacturing costs are applied to units of product on the basis ofeach year's production. (That is, a new fixed overhead rate is computedeach year).c. Variable selling and adrhinistrative expenses are P2 per unit sold. Fixedselling and administrative expenses total P70,000 per year.d. The company uses a FIFO inventory flow assumption.Required:1. Prepare a new income statement for each year using the contributionapproach with variable costing.2. Refer to the absorption costing income statements above.a. Compute the unit product cost in each year under absorption costing.(Show how much of this cost is variable and how much is fixed).b. Reconcile the variable costing and absorption costing net operatingincome figures for each year.3. Refer again to the absorption costing income statements. Explain why netoperating income was higher in Year 2 than it was in Year I under theabsorption approach, in light of the fact that fewer units were sold in Year2 than in Year 1.4. Refer again to the absorption costing income statements. Explain why thecompany suffered a loss in Year 3 but reported a profit in Year 1, althoughthe same number of units was sold in each year.5. a. Explain how operations would have differed in Year 2 and Year 3 ifthe company had been using JIT inventory methods.b. If JIT had been in use during Year 2 and Year 3, what would thecompany's net operating income (or loss) have been in each yearunder absorption costing? Explain the reason for any differencesbetween these income figures and the figures reported by the companyin the statements above.

Name: Strategic Cost Management Problem 4 (Prepare and Interpret Statements;
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Description: Strategic Cost Management Problem 4 (Prepare and Interpret Statements; Changes in Both Sales andProduction; JIT)Nemo, Inc. manufactures and sells a unique electronic part. Operating resultsfor the first three years of activity were as follows (absorp

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1. Prepare a new income statement for each year using approach with variable costing. 2. Refer to the absorption costing income statements above. a. Compute the unit product cost in each year under absorption costing. (Show how much of this cost is variable and how much is fixed). b. Reconcile the variable costing and absorption costing net operating income figures for each year. 3. Refer again to the absorption costing income statements. Explain why net operating income was higher in Year 2 than it was in Year I under the absorption approach, in light of the fact that fewer units were sold in Year 2 than in Year I.

1. Prepare a new income statement for each year using approach with variable costing. 2. Refer to the absorption costing income statements above. a. Compute the unit product cost in each year under absorption costing. (Show how much of this cost is variable and how much is fixed). b. Reconcile the variable costing and absorption costing net operating income figures for each year. 3. Refer again to the absorption costing income statements. Explain why net operating income was higher in Year 2 than it was in Year I under the absorption approach, in light of the fact that fewer units were sold in Year 2 than in Year I.

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Chapter4: Operating Activities: Sales And Cash Receipts

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