Question

Swola Company reports the following annual cost data for its single product. Normal production level 75,000 units Direct materials $ 1.25 per unit Direct labor $ 2.50 per unit Variable overhead $ 3.75 per unit Fixed overhead $ 300,000 in total This product is normally sold for $25 per unit. If Swola increases its production to 200,000 units, while sales remain at the current 75,000 unit level, by how much would the company's income increase or decrease under variable costing

Answer 1

Answer:

An increase in production generates no change in income.

Explanation:

Under variable costing, the invariable costs are direct material, direct labor, and variable overhead. Therefore, an increase in production generates no change in income.

Current income:

Contribution margin= 75,000*(25 - 7.5)= $1,312,500

Fixed overhead= (300,000)

Net operating income= 1,012,500

Hypothetical income:

Contribution margin= 75,000*(25 - 7.5)= $1,312,500

Fixed overhead= (300,000)

Net operating income= 1,012,500

Income varies if the unitary variable components change. A supplier offers a discount on materials or the labor gets more efficient due to the learning curve.