Question

A company has $25 per unit selling price, $7.00 per unit in variable production cost and...


A company has $25 per unit selling price, $7.00 per unit in variable production cost and $2.00 per unit in variable selling and administrative cost. The annual fixed production cost is $400,000. The annual fixed selling and administrative cost is $50,000.

Complete the table below for each year. Assume a FIFO flow.

2016
Units Produced 120,000
Units Sold 110,000
1- Operating income under variable costing
2- Operating income under absorption costing

Homework Answers

Answer #1
1) Operating Income under Variable Costing
Sales Revenue (110,000 * $25) $2,750,000
Less: Variable Costs:
   Production Costs (110,000 * $7 per unit) ($770,000)
   Variable selling and administration (110,000 * $2 per unit) ($220,000)
Contribution Margin
Less: Fixed Costs:
   Production Costs ($400,000)
   Selling and administrative costs ($50,000)
Net Operating Income $1,310,000
2) Operating Income under Absorption Costing
Sales Revenue (110,000 * $25) $2,750,000
Less: Cost of Goods Sold ($400,000/120,000 = $3.33 + $7 = $10.33* 110,000) ($1,136,667)
Gross Profit $1,613,333
Less: Selling and administrative expenses ($50,000 + $220,000) ($270,000)
Net Operating Income $1,343,333
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