Question

The Colin Division of Mochrie Company sells its product for $35 per unit. Variable costs per unit are: manufacturing, $15; and selling and administrative, $4. Fixed costs are: $280000 manufacturing overhead, and $50000 selling and administrative. There was no beginning inventory. Expected sales for next year are 40000 units. Ryan Stiles, the manager of the Colin Division, is under pressure to improve the performance of the Division. As he plans for next year, he has to decide whether to produce 40000 units or 50000 units. What would the net income be under variable costing for each alternative?

     40000 units         50000 units

$310000             $310000

$310000             $366000

$310000             $376000

$366000             $310000

Answer 1

Income statement (when 40,000 units are produced)
Sales (40,000 x 35)		1,400,000
Variable costs:
Variable manufacturing costs (40,000 x 15)		-600,000
Variable selling and administrative expenses (40,000 x 4)		-160,000
Contribution Margin		640,000
Fixed costs:
Fixed manufacturing costs		-280,000
Fixed selling and administrative expenses		-50,000
Net income		$310,000

When 50,000 units are produced, net income under variable costing will be same as net income when 40,000 units are produced.

Under Variable costing method, It does not matter how many units are produced whether 40,000 units are produced or 50,000 units are produced, net income will be same, Since the number of units sold is 40,000 units under both the situations

First option is correct.