Pungent Corporation manufactures and sells a spice rack. Shown below are the actual operating results for the first two years of operations: Pungent's selling price and unit variable cost and total fixed cost were the same for both years. What is Pungent's variable costing net operating income for Year 2?
A) $48,000
B) $50,000
C) $54,000
D) $56,000

Question

Pungent Corporation manufactures and sells a spice rack. Shown below are the actual operating results for the first two years of operations:  Pungent's selling price and unit variable cost and total fixed cost were the same for both years. What is Pungent's variable costing net operating income for Year 2?
A) $48,000 
B) $50,000 
C) $54,000 
D) $56,000

Quizplus · Accepted Answer

Year 1:
 11eacbfc_c6b2_6b0b_8ffe_af0341910e79_TB7552_00 *Plug figure
Units in ending inventory = Units in beginning inventory + Units produced − Units sold
= 0 units + 40,000 units − 37,000 units = 3,000 units
Manufacturing overhead deferred in (released from) inventory = Fixed manufacturing overhead in ending inventory − Fixed manufacturing overhead in beginning inventory
$6,000 = (Fixed manufacturing overhead per unit × 3,000 units) − $0
Fixed manufacturing overhead per unit = $6,000 ÷ 3,000 units = $2 per unit
Year 2:
Units in ending inventory = Units in beginning inventory + Units produced − Units sold
= 3,000 units + 40,000 units − 41,000 units = 2,000 units
Because 40,000 units were produced in both Year 1 and Year 2, the fixed manufacturing overhead per unit should have been the same in Year 2 as in Year 1.
Manufacturing overhead deferred in (released from) inventory = Fixed manufacturing overhead in ending inventory − Fixed manufacturing overhead in beginning inventory
= ($2 per unit × 2,000 units) − ($2 per unit × 3,000 units) = −$2,000
 11eacbfc_c6b2_6b0c_8ffe_a555576fb05f_TB7552_00 *Plug figure

Pungent Corporation Manufactures and Sells a Spice Rack