Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 31

Profit centers: Full and Variable Costing Fitzpatrick Inc. planned and manufactured 500,000 units of its single product in 2010, its first year of operations. Variable manufacturing cost were $40 per unit of production. Planned fixed manufacturing costs were $1,200,000. Marketing and administrative costs (all fixed) were $500,000 in 2010. Fitzpatrick sold 450,000 units of products in 2010 at $50 per unit.

Required

1. Determine Fitzpatrick Inc.’s operating income using full costing.

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2. Determine Fitzpatrick Inc.’s operating income using variable costing.

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3. Explain the difference between the operating incomes in requirements 1 and 2.

Step 1 of 4

Fixed cost is the portion of total cost which does not changes with change in level of production. Variable cost is the portion of total cost which changes with change in level of production.