Share
Explore BrainMass

The Hadfield Company

(See attached file for full problem description)

(TCO E) The Hadfield Company was organized on January 1, 2001, to manufacture and sell a unique electronic part. The company's plant is highly automated with low variable and high fixed manufacturing costs. Operating results for the first three years of activity were as follows (absorption costing basis) Additional information about the company is as follows:
2001 2002 2003
SALES 500,000 400,000 500,000
Cost of goods sold
beginning inventory 0 0 140,000

add: cost of goods manufactured 400,000 420,000 380,000
goods available for sales 400,000 420,000 520,000
less:ending inventory 0 140,000 95,000

cost of goods sold 400,000 280,000 425,000
gross margin 100,000 120,000 75,000
less selling and admin expenses 85,000 75,000 85,000

Net operating income (loss) 15,000 45,000 -10,000

Additional information about the company is as follows:

Variable manufacturing costs (direct labor, direct materials, and variable manufacturing overhead) total $2 per unit, and fixed manufacturing costs total $300,000 per year.
Fixed manufacturing costs are applied to units of product on the basis of each year's production (i.e. a new fixed manufacturing overhead rate is computed each year.)
The company uses a FIFO inventory flow.
Variable selling and administrative expenses are $1 per unit sold.
Fixed selling and administrative expenses total $70,000 per year.
Production and sales information for the three years is as follows:

Production in units 50,000 60,000 40,000
sales in units 50,000 40,000 50,000

Required
Compute new operating income for each year under the variable cost approach

Attachments

Solution Preview

2001 2002 2003
SALES 500,000 400,000 500,000
Cost of goods sold expense
beginning inventory 0 0 40,000
add: cost of goods manufactured
Variable manufacturing costs ($2 x ...

Solution Summary

This solution is comprised of a detailed explanation to compute new operating income for each year under the variable cost approach.

$2.19