Question

Kenzi Kayaking, a manufacturer of kayaks, began operations this year. During this first year, the company produced 1,075 kayaks and sold 825 at a price of $1,075 each. At this first year-end, the company reported the following income statement information using absorption costing. Sales (825 × $1,075) $ 886,875 Cost of goods sold (825 × $475) 391,875 Gross margin 495,000 Selling and administrative expenses 230,000 Net income $ 265,000 Additional Information Product cost per kayak totals $475, which consists of $375 in variable production cost and $100 in fixed production cost—the latter amount is based on $107,500 of fixed production costs allocated to the 1,075 kayaks produced. The $230,000 in selling and administrative expense consists of $95,000 that is variable and $135,000 that is fixed. Required: 1. Prepare an income statement for the current year under variable costing. 2. Fill in the blanks:

Answer 1

Answer:

Net income under absorption costing is $240,000

Explanation:

Sales   (825*$1075)                            $886,875

less variable costs

Variable production cost($375*825)  (309,375)

selling and admin. expense                ($95,000)

Contribution margin                             $482,500

less fixed costs:

fixed production cost                          ($107,500)

selling and admin. expense                ($135,000)

Net income                                           $240,000  

Net income under absorption was $25,000 more than the net income under the absorption costing, the difference is analyzed below:

Fixed product costs (1075-825)*$100=$25,000

That is the fixed production costs added to closing inventory under absorption method which was expensed under variable costing method