Leheny Corporation manufactures and sells one product. The following information pertains to the company's first year of operations: The company does not have any variable manufacturing overhead costs or variable selling and administrative expenses. During its first year of operations, the company produced 55,000 units and sold 50,000 units. The company's only product is sold for $238 per unit.Assume that the company uses a variable costing system that assigns $21 of direct labor cost to each unit that is produced. The net operating income under this costing system is:
A) $1,400,000
B) $1,005,000
C) $1,110,000
D) $580,000

Question

Leheny Corporation manufactures and sells one product. The following information pertains to the company's first year of operations:  The company does not have any variable manufacturing overhead costs or variable selling and administrative expenses. During its first year of operations, the company produced 55,000 units and sold 50,000 units. The company's only product is sold for $238 per unit.Assume that the company uses a variable costing system that assigns $21 of direct labor cost to each unit that is produced. The net operating income under this costing system is:
A) $1,400,000 
B) $1,005,000 
C) $1,110,000 
D) $580,000

Quizplus · Accepted Answer

Under variable costing system:

Total variable cost per unit = Direct Materials + Direct Labor + Variable Manufacturing Overhead = $75 + $21 + $0 = $96
Contribution margin per unit = Sales price per unit - Total variable cost per unit = $238 - $96 = $142
Contribution margin ratio = Contribution margin per unit / Sales price per unit = $142 / $238 = 0.5966

Total fixed manufacturing costs = $990,000
Total fixed selling and administrative expenses = $165,000

Therefore, net operating income = (Contribution margin per unit x Number of units sold) - Total fixed manufacturing costs - Total fixed selling and administrative expenses
= ($142 x 50,000) - $990,000 - $165,000
= $7,100,000 - $1,155,000
= $5,945,000

Hence, the net operating income is $1,110,000 (Option C).

Leheny Corporation Manufactures and Sells One Product