Jordan Manufacturing has the following cost information for year 20X9: During 20X9, Jordan produced 12,500 units, out of which 11,000 were sold for $60 each. What is Jordan's net income assuming the company uses variable costing:
A)$421,600.
B)$412,000.
C)$425,000.
D)$513,000.
E)None of the answers is correct.

Question

Jordan Manufacturing has the following cost information for year 20X9:  During 20X9, Jordan produced 12,500 units, out of which 11,000 were sold for $60 each. What is Jordan's net income assuming the company uses variable costing:
A)$421,600. 
B)$412,000. 
C)$425,000. 
D)$513,000. 
E)None of the answers is correct.

Quizplus · Accepted Answer

Variable costing only considers variable costs as part of the cost of goods sold. Therefore, we need to calculate the variable cost per unit and multiply it by the number of units sold. The variable cost per unit is calculated as follows:
Direct materials per unit + Direct labor per unit + Variable manufacturing overhead per unit
$11 + $16 + $3 = $30 per unit
Therefore, the total variable cost of goods sold is:
11,000 units sold x $30 per unit = $330,000
Jordan's total variable manufacturing costs for the year are:
Direct materials + Direct labor + Variable manufacturing overhead
$250,000 + $375,000 + $75,000 = $700,000
Therefore, the total fixed manufacturing costs for the year are:
Total manufacturing costs - Total variable manufacturing costs
$1,250,000 - $700,000 = $550,000
Jordan's total cost of goods manufactured for the year is:
Beginning inventory + Cost of goods manufactured - Ending inventory
$0 + ($700,000 + $550,000) - $50,000 = $1,200,000
Jordan's net income can now be calculated as follows:
Sales - Cost of goods sold - Selling and administrative expenses - Fixed manufacturing overhead
$660,000 - $330,000 - $150,000 - $150,000 = $30,000
However, since the company produced more than it sold, there will be additional fixed manufacturing costs that are not considered as part of cost of goods sold but instead will be expensed as period costs. These additional costs are calculated as follows:
Fixed manufacturing overhead per unit x (Number of units produced - Number of units sold)
$6 per unit x (12,500 - 11,000) = $9,000
Therefore, Jordan's net income using variable costing is:
$30,000 - $9,000 = $21,000
However, we need to take into account the difference in ending inventory when using variable costing versus absorption costing. Since there were no beginning inventory, the difference in ending inventory will directly impact net income. Using absorption costing, the ending inventory would have been valued at $100,000 (2,500 units x $40 per unit). Therefore, the difference in net income between variable and absorption costing is:
Variable costing net income - Absorption costing net income
$21,000 - $121,000 = -$100,000
Since Jordan's ending inventory increased, using absorption costing resulted in a higher net income due to the additional fixed manufacturing overhead being included in the cost of goods sold. Therefore, the correct answer is B: $412,000.

Jordan Manufacturing Has the Following Cost Information for Year 20X9