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Will net income rise or fall the year

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PPX is a specialized packaging company that packages other manufacturers' products. Other manufacturers ship their products to PPX in bulk. PPX then packages the products using high-speed, state-of-the-art packaging machines and ships the packaged products to wholesalers. A typical order involves packaging small toys in see-through plastic and cardboard containers.

  • PPX uses a flexible budget to forecast annual plantwide overhead, which is then allocated to jobs based on machine hours. The annual flexible overhead budget is projected to be $6 million of fixed costs and $120 per machine hour. The budgeted number of machine hours for the year is 20,000.
  • At the end of the year, 21,000 machine hours were used and actual overhead incurred was $9.14 million.

Problem 1: The company's policy is to write off any over/under-absorbed overhead to cost of goods sold. Will net income rise or fall this year when the over/under-absorbed overhead is written off to cost of goods sold?

Cost of Goods Sold ; Net Income

A. Increase ; Increase
B. Increase ; Decrease
C. Decrease ; Increase
D. Decrease ; Decrease

Reference no: EM132770347

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