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 annual estimated factory overhead rate is used,what are the gross profits for Year 2 and Year 3,respectively?
A)$120,000 and $100,000
B)$120,000 and $150,000
C)$150,000 and $100,000
D)$250,000 and $250,000

Question

Quizplus · Accepted Answer

To calculate the gross profits for Year 2 and Year 3, we first need to determine the factory overhead rate, the cost of goods sold (COGS), and then the gross profit for each year.1. **Factory Overhead Rate Calculation:**Given that the predicted factory overhead for each year is $120,000 and the predicted activity is 30,000 direct labor hours for Year 2 and 20,000 direct labor hours for Year 3, we calculate the overhead rate based on the normal production level of 20,000 direct labor hours per year (as the company assumes this as the long-run normal production level).Factory Overhead Rate = Total Factory Overhead / Normal Production Level in Hours= $120,000 / 20,000 hours= $6 per direct labor hour2. **Year 2 Calculations:**- Sales Revenue = 25,000 units * $20 = $500,000- COGS = (Direct Materials and Direct Labor per unit + Applied Overhead per unit) * Number of units= ($10 + $6) * 25,000= $16 * 25,000= $400,000- Gross Profit = Sales Revenue - COGS= $500,000 - $400,000= $100,0003. **Year 3 Calculations:**For Year 3, the calculation of gross profit would typically follow the same structure. However, without specific sales units and prices for Year 3 in the question, we rely on the provided choices to infer the correct answer. Given the structure of the question and the calculation for Year 2, the correct choice must include the $100,000 gross profit for Year 2, which leads us to the correct answer by elimination.Given the choices provided and the calculation for Year 2, the correct answer is inferred to be the one that includes the $100,000 gross profit for Year 2 and provides a plausible figure for Year 3 based on the same methodology, which is $150,000 for Year 3. However, there seems to be a misunderstanding in the explanation process due to the lack of specific data for Year 3's sales and prices in the question. The correct calculation approach for Year 2 has been demonstrated, but for Year 3, we would need similar sales data to accurately calculate the gross profit. The selection based on the provided information and calculation method points towards an inconsistency in the explanation regarding Year 3's gross profit calculation.

Adams Company Predicted Factory Overhead for Year 2 and Year