Home Products Inc Has Failed to Reach Its Planned Activity

question 27

Multiple Choice

Home Products Inc has failed to reach its planned activity level during its first two years of operation. The following table shows the relationship between units produced, sales, and normal activity for these years and the projected relationship for Year 3. All prices and costs have remained the same for the last two years and are expected to do so in Year 3. Income has been positive in both Year 1 and Year 2. $\begin{array}{llll}&\text { Units } & & \text { Planned } \\&\text { Produced } & \text { Sales } & \text { Production }\\\text { Year 1 } & 90,000 & 90,000 & 100,000 \\\text { Year 2 } & 95,000 & 95,000 & 100,000 \\\text { Year 3 } & 95,000 & 90,000 & 100,000\end{array}$ Because Home Products uses a full costing system, one would predict operating income for Year 3 to be:

• A) Greater than operating income under variable costing.
• B) Less than year 2.
• C) The same as operating income under variable costing.
• D) Less than the operating income under variable costing.

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