Burke Company produced 8,600 units of inventory and sold 6,600 of them. The company incurred the following production costs:

Burke Company produced 8,600 units of inventory and sold 6,600 of them. The company incurred the following production costs:

Variable manufacturing cost: $6.30 per unit
Fixed manufacturing overhead cost: $34,830

 Assuming the company sells its product at a price of $22 per unit, and incurred $11,400 in selling and administrative costs, what is the amount of net income under absorption costing?
$63,490
$53,490

$65,490 Correct
$77,490

Answer
$65,490 Correct
Explanation
Net income = Sales − Variable manufacturing cost − Fixed manufacturing cost − Selling and administrative expenses

Net income = (6,600 units × $22 per unit) − (6,600 units × $6.30 per unit) − ($34,830 ÷ 8,600 units × 6,600 units) − $11,400 = $65,490

Outdoor Living Company has just received a special order for 500 hammocks. Outdoor Living has sufficient idle capacity to accept the order. Accepting the order will increase Outdoor Living's variable manufacturing costs. Variable selling and administrative costs would be unaffected. What is the minimum price that Outdoor Living should accept for the special order?

Multiple Choice
A price equivalent to the hammock's variable manufacturing cost per unit Correct
A price equivalent to the hammock's unit contribution margin
The same price that Outdoor Living charges its existing customers
None of these answers are correct.


Answer
A price equivalent to the hammock's variable manufacturing cost per unit Correct
Explanation
If the relevant revenue exceeds the relevant (avoidable) costs, the special order should be accepted. As such, the minimum selling price should equal the relevant cost per unit. The relevant costs in a special order decision are the unit-level and batch-level costs that will be incurred if the special order is accepted. In this situation, the variable manufacturing cost per unit is the relevant cost.

Which of the following statements is incorrect?
Multiple Choice
A company may need to allocate overhead costs to products to make pricing decisions for the products.
A predetermined overhead rate may be used to allocate overhead costs when volume varies during the year.
A predetermined overhead rate is calculated using actual cost and volume data.Correct
A predetermined overhead rate is calculated by dividing costs by volume, using a measure of volume such as direct labor hours or direct materials cost.
Answer
A predetermined overhead rate is calculated using actual cost and volume data.Correct

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