Adams Company Predicted Factory Overhead for Year 2 and Year

question 57

Multiple Choice

Adams Company predicted factory overhead for Year 2 and Year 3 would be $120,000 for each year. The predicted activity for Year 2 and Year 3 would be 30,000 and 20,000 direct labour hours, respectively. Additional data are as follows:
$\begin{array}{lcc}&\underline{\text { Year } 1} & \underline{\text { Year } 2}\\\text { Sales in units } & 25,000 & 25,000 \\\text { Selling price per unit } & \$ 20 & \$ 20 \\\text { Direct materials and direct labour per unit } & \$ 10 & \$ 10\end{array}$ The company assumes that the long-run normal production level is 20,000 direct labour hours per year.The actual factory overhead cost for the end of Year 1 and Year 2 was $120,000.Assume that it takes one direct labour hour to make one finished unit.
-Refer to the figure.When the normal factory overhead rate is used,what are the gross profits for Year 2 and Year 3,respectively?

• A)$80,000 and $80,000
• B)$100,000 and $100,000
• C)$120,000 and $140,000
• D)$200,000 and $200,000

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Definitions:

Lowest Price

the minimum price at which a product or service is offered in the market.

Producer Surplus

The difference between the amount that producers are willing to accept for a good or service and the actual amount they receive, due to higher market prices.

Supply Curve

A graphical representation showing the relationship between the price of a good and the quantity of that good that producers are willing to supply.

Efficiency

The ability to produce maximum output with a given set of inputs or resources, minimizing waste and costs.