Question

A business operated at 100% of capacity during its first month, with the following results:

Sales (99 units)		$534,600
Production costs (124 units):
Direct materials	$72,384
Direct labor	18,481
Variable factory overhead	32,342
Fixed factory overhead	30,801	154,008
Operating expenses:
Variable operating expenses	$6,251
Fixed operating expenses	3,704	9,955

The amount of gross profit that would be reported on the absorption costing income statement is

a. $401,687

b. $405,391

c. $411,642

d. $534,476

1. On October 31, the end of the first month of operations, Morristown & Co. prepared the following income statement based on absorption costing:
   

   Morristown & Co.
   Absorption Costing Income Statement
   For the Month Ended October 31
   Sales (2,600 units)				$117,000
   Cost of goods sold:
   Cost of goods manufactured		$85,500
   Ending inventory (400 units)		(11,400)
   Total cost of goods sold				(74,100)
   Gross profit				$42,900
   Selling and administrative expenses				(21,500)
   Operating income				$21,400

   If the fixed manufacturing costs were $42,900 and the variable selling and administrative expenses were $14,600, prepare an income statement using variable costing.

   Morristown & Co.
   Variable Costing Income Statement
   For the Month Ended October 31
   Ending inventory Fixed manufacturing costs Sales Variable cost of goods manufactured Wages expense		$
   Variable cost of goods sold:
   Fixed selling and administrative expenses Sales Variable cost of goods manufactured Variable cost of goods sold Wages expense	$
   Ending inventory Fixed selling and administrative expenses Sales Utilities expense Variable cost of goods sold
   Ending inventory Fixed manufacturing costs Total variable cost of goods sold Utilities expense Variable cost of goods manufactured
   Ending inventory Fixed manufacturing costs Manufacturing margin Utilities expense Variable cost of goods manufactured		$
   Ending inventory Fixed manufacturing costs Variable cost of goods manufactured Variable selling and administrative expenses Wages expense
   Contribution margin Ending inventory Fixed manufacturing costs Variable cost of goods manufactured Wages expense		$
   Fixed costs:
   Ending inventory Fixed manufacturing costs Sales Variable cost of goods sold Wages expense	$
   Ending inventory Fixed selling and administrative expenses Sales Utilities expense Variable cost of goods sold
   Operating income		$

Answer 1

1
Sales	534600
Less: Cost of goods sold	122958	=154008*99/124
Amount of gross profit	411642
Option C $411,642 is correct

2
Variable Costing Income Statement
For the Month Ended October 31
Sales		117000
Variable cost of goods sold:
Variable cost of goods manufactured	42600		=85500-42900
Ending inventory	(5680)		=42600*400/3000
Total variable cost of goods sold		(36920)
Manufacturing margin		80080
Variable selling and administrative expenses		(14600)
Contribution margin		65480
Fixed costs:
Fixed manufacturing costs	42900
Fixed selling and administrative expenses	6900	(49800)
Operating income		15680
The amounts can alternatively be written without parenthesis.