Question

William Company makes a single product, bucket stoppers. During 2017, 155,000 units were sold and 150,000 units were produced. Information for 2017 appears below: Beginning inventory in units Variable production cost per unit Variable operating costs per unit Fixed production cost per year Fixed selling and administrative cost per year Selling price per unit 6,000 $1.20 $0.80 $127,500 $32,000 $6.00 How much is the contribution margin for 2017 under variable costing? How much is the gross margin for 2017 under full costing? Explain why variable and full costing produce different results. a. b. с.

Answer 1

a.
Contribution margin under variable costing is calculated as sales revenue less total variable costs.
Calculation of contribution margin for 2017 is shown below
Sales revenue	$930,000	155000*6
Less: Variable costs
Variable production cost	$186,000	155000*1.20
Variable operating costs	$124,000	155000*0.80
Total variable costs	$310,000
Contribution margin	$620,000
b.
Gross margin under absorption costing is calculated as sales revenue less cost of goods sold
Calculation of product cost
Variable production	$1.20
Fixed production	$0.85	(127500/150000)
Product cost per unit	$2.05
Calculation of gross margin under absorption costing
Sales revenue	$930,000	155000*6
Less: Cost of goods sold	$317,750	155000*2.05
Gross margin	$612,250
c.
Variable costing includes only variable costs as part of product costs while absorption costing includes both variable and fixed manufacturing costs as product costs.
Thus, the results vary under both the methods.