Part 1 of 3:

ABC Company sells 10,000 units of a product at $30 per unit. This is the first year of operations so there is no beginning inventory of finished units. The following information is available:

Units produced 12,000

Raw material costs per unit $6.00

Direct labor cost per unit $2.00

Variable overhead per unit $3.00

Fixed overhead total costs $48,000

Fixed overhead costs per unit $4.00

Variable selling expense per unit sold $1.00

Fixed selling expenses $60,000

Required:

1. Calculate operating income under absorption costing – show work.

2. Calculate operating income under variable costing – show work.

3. Explain why the difference in incomes exist.

Part 2 of 3:

XYZ purchases 10,000 unit of a product each year in lots of 1,000 units per order. The cost of placing an order is $20 and the cost of carrying one unit of product in inventory is $10 per year.

Required:

1. How many orders is placed per year?

2. What is the total ordering costs per year?

3. What is the total carrying cost of the inventory per year?

4. What is the total cost of carrying and ordering for the year?

5. What is the EOQ amount? What would the total cost of carrying and ordering be for the year if the EOQ amount was used?

Part 3 of 3:

MNO uses 50,000 units of a product per year. Each day an average of 200 units are used in production. However, some days as many as 250 units are used. It takes 5 days from the time of ordering the units to the time of arrival of the order.

Required:

1. What is the reorder point without safety stock?

2. What is the amount of safety stock needed to avoid any stocking out?

3. What is the reorder point with safety stock?