Question

Start Me Up Inc. manufactures a caffeinated energy drink that sells for $4.10 each. The results for its first year of operations appear in the table below:

	Projections
Number of drinks produced		48,000
Number of drinks sold		46,000
Direct materials per drink	$	0.56
Direct labor per drink	$	0.26
Variable manufacturing overhead per drink	$	0.16
Total fixed manufacturing overhead	$	28,800
Total fixed selling and administrative costs	$	50,500

Required:

1. Compute the operating income for the first year under full costing.

2. Compute the operating income for the first year under variable costing.

(For all requirements, do not round intermediate calculations.)

Answer 1

Answer-1)-

STATRT ME UP INC.
Income statement (Using absorption costing approach)
Particulars			Amount
			$
Sales (a)	46000 units*$4.10 per unit		188600
Less:- Cost of goods sold (b)
Opening inventory
Add:- Cost of goods manufactured		47040
Direct materials	48000 units*$0.56 per unit	26880
Direct labor	48000 units*$0.26 per unit	12480
Variable manufacturing overhead	48000 units*$0.16 per unit	7680
Fixed Manufacturing overhead		28800
Cost of goods available for sale		75840
Less:- Closing inventory	2000 units*$1.58 per unit	3160	72680
Gross margin C= a-b			115920
Less:- Fixed costs
Selling & administrative exp.			50500
Net Income			65420

Explanation- Unit product cost under Absorption costing:-Direct materials + Direct Labor+ Variable manufacturing overhead + fixed manufacturing overhead

=$0.56+$0.26+$0.16+$0.60

= $1.58 per unit

Unit fixed manufacturing overhead= fixed manufacturing overhead/No. of units produced

=$28800/48000 units

=$0.60 per unit

2)-

STATRT ME UP INC.
Income statement (Using variable costing approach)
Particulars			Amount
			$
Sales (a)	46000 units*$4.10 per unit		188600
Less:- Variable cost of goods sold (b)
Opening inventory		NIL
Add:- Variable cost of goods manufactured		47040
Direct materials	48000 units*$0.56 per unit	26880
Direct labor	48000 units*$0.26 per unit	12480
Variable manufacturing overhead	48000 units*$0.16 per unit	7680
Variable cost of goods available for sale		47040
Less:- Closing inventory	2000 units*$0.98 per unit	1960	45080
Contribution margin c= a-b			143520
Less:- Fixed costs
Manufacturing overhead			28800
Selling & administrative exp.			50500
Net Income			64220

Explanation-Unit product cost under Variable costing:-Direct materials + Direct Labor+ Variable manufacturing overhead

=$0.56+$0.26+$0.16

= $0.98 per unit