Question

Rosland Graphics successfully bid on a job printing standard notebook covers during the year using last year's price of $0.27 per cover. This amount was calculated from prior year costs, noting that no changes in any costs had occurred from the past year to the current year. At the end of the year, the company manager was shocked to discover that the company had suffered a loss. "How could this be?" she exclaimed. "We had no increases in cost and our price was the same as last year. Last year we had a healthy income." What could explain the company's loss in income this current year?

A. Their costs were all variable costs and the amount produced and sold increased.

B. Their costs were mostly fixed costs and the amount produced this year was less than last year.

C. They used a different cost object this year than the previous year.

D. Their costs last year were actual costs but they used budgeted costs to make their bids.

Answer 1

The company's loss could be due to producing fewer units this year with mostly fixed costs, changes in cost objects, or using budgeted costs instead of actual costs to price their products, all leading to financial discrepancies and ultimately, a loss.

Step-by-step explanation:

The company's loss in income this current year despite having the same costs and prices as last year could potentially be explained by changes in the structure of their costs or changes in the quantity produced. There may not have been a change in costs, but if the number of units produced and sold this year was less than last year, and the company had mostly fixed costs, then the average cost per unit would increase, leading to a loss

Similarly, a change in the cost object could lead to a misalignment between cost calculations and actual expenses, although the cost structure did not change from the previous year. Without changes in cost structure or pricing, a loss could also occur if the costs were based on budgeted amounts rather than actual costs, leading to a discrepancy between anticipated and real expenses.