Answer:
The absorption costing method provides the higher net operating income.
Explanation:
Giving the following information:
Selling price= $110 per unit.
Cost information for the product is as follows:
Direct Material $15 per Unit
Direct Labor $25 per Unit
Variable Overhead $5 per Unit
Fixed Overhead $33,500
Selling expenses are $3 per unit and are all variable.
Administrative expenses of $15,000 are all fixed.
Grainger produced 5,000 units; sold 4,000; and had no beginning inventory.
<u>The difference between absorption and variable costing methods is that the first one includes the fixed manufacturing overhead in the product cost.</u>
First, we will calculate the unitary product cost under both methods.
Variable costing method;
Unitary cost= direct material + direct labor + variable overhead
Unitary cost= 15 + 25 + 5= $45
Absorption costing method:
Unitary cost= direct material + direct labor + total unitary overhead
Unitary cost= 15 + 25 + 5 + (33,500/5,000)= $51.7
Income statement Variable costing method:
Sales= 4,000*110= 440,000
Varaible cost= 4,000*45= (180,000)
Contribution margin= 260,000
Fixed overhead= (33,500)
Selling expenses= (3*4,000)= (12,000)
Administrative expenses= (15,000)
Net operating income= 199,500
Income statement under absorption costing method:
Sales= 440,000
Cost of goods sold= (51.7*4,000)= (206,800)
Gross profit= 233,200
Selling expenses= (3*4,000)= (12,000)
Administrative expenses= (15,000)
Net operating income= 206,200