Question

18-4. Start Me Up Inc. manufactures a caffeinated energy drink that sells for $4.40 each. The results for its first year of operations appear in the table below:

Number of drinks produced		49,500
Number of drinks sold		46,300
Direct materials per drink	$	0.59
Direct labor per drink	$	0.29
Variable manufacturing overhead per drink	$	0.19
Total fixed manufacturing overhead	$	31,185
Total fixed selling and administrative costs	$	52,000

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

1. Operating Income under full costing = $70,994

2. Operating Income under variable costing = $154,179

		$
Selling Price per drink		4.4
Variable Cost of Production per drink
a.	Direct Material	0.59
b.	Direct Labour	0.29
c.	Variable Manufacturing overhead	0.19
Total Variable Cost per drink		1.07
Contribution Margin per drink		3.33
Number of drinks sold		46,300
Total Contribution Margin		154,179.00
less:	Total fixed manufacturing overheads	31,185.00
less:	Total fixed selling and administration costs	52,000.00
Total Operating Income		70,994.00

Variable costs are product costs and fixed costs are period costs. variable cost changes with the number of units produced while fixed costs will not change with the change in production. Hence, the Variable cost of production of closing stock will not be considered in calculating operating profits of the current period, they will be considered in the year of its sale.