Question

FAGAN MANUFACTURING COMPANY INCOME STATEMENT FOR THE YEAR ENDING DECEMBER 31, 2009 Sales $900,000 Cost of goods sold: Finished goods inventory, January 1 $0 Cost of goods manufactured 812,500 Goods available for sale $812,500 Finished goods inventory, December 31 162,500 Cost of goods sold 650,000 Gross margin $250,000 Less Operating expenses: Selling $135,000 Administrative 30,000 Total selling and administrative 165,000 Operating profit $85,000 The following additional information is available: Variable costs per unit: Direct materials $9.50 Direct labor 12.00 Manufacturing overhead 4.00 Selling expenses 5.50 Fixed costs for the period: Manufacturing overhead $175,000 Selling 25,000 Administrative 30,000 ii. Prepare an income statement using variable costing.

Answer 1

Total selling expenses = $135,000

Variable selling expenses per unit = $5.50

Fixed selling expenses = $25,000

Let the number of units sold be K.

K x 5.50 + 25,000 = 135,000

5.50K = 110,000

K = 20,000

Hence, Number of units sold = 20,000

FAGAN MANUFACTURING COMPANY
Variable Costing Income Statement
Sales		$900,000
Less: Variable expense:
Direct materials (20,000 x 9.50)	190,000
Direct labor (20,000 x 12)	240,000
Manufacturing overhead (20,000 x 4)	80,000
Selling expenses (20,000 x 5.50)	110,000
Total Variable expenses		-620,000
Contribution margin		$280,000
Less: Fixed expense:
Manufacturing overhead	175,000
Selling expenses	25,000
Administrative expenses	30,000
Total fixed expenses		-230,000
Net Income		$50,000

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