Question

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

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