Fields Cutlery, a manufacturer of gourmet knife sets, produced 20,000 sets and sold 23,000 units during the current year. Beginn

Question

3 years ago

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Fields Cutlery, a manufacturer of gourmet knife sets, produced 20,000 sets and sold 23,000 units during the current year. Beginn

ing inventory under absorption costing consisted of 3,000 units valued at $66,000 (Direct materials $12 per unit; Direct labor, $3 per unit; Variable Overhead, $2 per unit, and Fixed overhead, $5 per unit.) All manufacturing costs have remained constant over the 2-year period. At year-end, the company reported the following income statement using absorption costing: Sales (23,000 × $45) $ 1,035,000 Cost of goods sold (23,000 × $22) 506,000 Gross margin $ 529,000 Selling and administrative expenses 115,000 Net income $ 414,000 60% of total selling and administrative expenses are variable. Compute net income under variable costing.

Business

1 answer:

Andreyy89 · Answer 1 · 2022-03-26T03:15:56+03:00

Answer:

Net income under variable costing would be $429,000.

Explanation:

Under the variable costing method the most important point to understand here is that fixed cost of the previous period ( 3000 units in this case ) would not be carried over to current period. Which means that the fixed cost and cost of goods sold be less now and the profit will increase.

NET INCOME =

SALES = $ 1035,000 ( 23,000 X 45 )

(-) COST OF GOODS SOLD = ($ 391,000) ( 23000 X 17 )

( We have multiplied 23,000 units by 17 because now those fixed cost of $5 are not carried forward to this period)

GROSS CONTRIBUTION MARGIN = $1035,000 - $391,000

= $644,000

(-)VARIABLE SELLING AND ADMINISTRATION EXPENSES = ($69,000)

( $115,000 X 60% )

CONTRIBUTION MARGIN = $644,000 - $69,000

= $575,000

(LESS) FIXED COSTS = ($146,000) [ $100,000 + $46,000 ]

1) MANUFACTURING COST = 20,000 X $5