Question

DC and Marvel would like to evaluate one of the product lines that they sell to defense department. Every month the Company produce an identical number of units, although the sales in units differ from month to month. А $111 ТВ 109 Selling price Units in beginning inventory Units produced Units sold 400 8,800 8,900 360 6900 7200 Variable costs per unit: Direct materials Direct labour Variable manufacturing overhead Variable selling and administrative Fixed costs: Fixed manufacturing overhead Fixed selling and administrative $61,600 $169,100 53,500 145,000 Required: 1. Compute the total Contribution Margin. 2. Compute the Operating Income under Variable Costing. 3. Prepare reconciliation from your Variable Costing Operating Income to compute Operating Income under absorption costing.

Answer 1

Answer 1

Variable costing income statement
	A	B
Sales (A)	$   987,900	$   799,200
	(8900*111)	(7200*111)
Variable costs per unit:
Direct materials	$   302,600	$   208,800
Direct labour	$   329,300	$   223,200
Variable manufacturing overhead	$     26,700	$     14,400
Variable selling and administrative	$     80,100	$     64,800
Total variable cost (B)	$   738,700	$   511,200
Contribution margin (C)	$   249,200	$   288,000

Answer 2

Contribution margin (C	$   249,200	$   288,000
Less:
Fixed manufacturing overhead	$     61,600	$     53,500
Fixed selling and administrative	$   169,100	$   145,000
Net operating Income	$     18,500	$     89,500

Answer 3

Income under variable costing	$ 18,500	$ 89,500
Add: Fixed manufacturing overhead in ending inventory	$ 2,100*	$ 465**
Income under absorption costing	$ 20,600	$ 89,965

*61,600/8,800*300 = $ 2,100

**53,500/6,900*60 = $ 465

In case of any doubt, please comment.