Tim's Tools, a manufacturer of cordless drills, began operations this year. During this year, the company produced 20,000 units and sold 18,000 units. At year-end, the company reported the following income statement using absorption costing: Production costs per unit total $14, which consists of $12.90 in variable production costs and $1.10 in fixed production costs (based on the 20,000 units produced). 60% of total selling and administrative expenses are variable. Compute net income under variable costing.
A) $307,800
B) $198,000
C) $195,800
D) $288,000
E) $220,000

Question

Tim's Tools, a manufacturer of cordless drills, began operations this year. During this year, the company produced 20,000 units and sold 18,000 units. At year-end, the company reported the following income statement using absorption costing:  Production costs per unit total $14, which consists of $12.90 in variable production costs and $1.10 in fixed production costs (based on the 20,000 units produced). 60% of total selling and administrative expenses are variable. Compute net income under variable costing.
A) $307,800 
B) $198,000 
C) $195,800 
D) $288,000 
E) $220,000

Quizplus · Accepted Answer

Under variable costing, only variable production costs and variable selling and administrative expenses are considered as product costs.

Variable production costs per unit = $12.90 
Therefore, total variable production costs = 18,000 units x $12.90 per unit = $232,200

Variable selling and administrative expenses = 60% x $270,000 (total selling and administrative expenses) = $162,000

Total product cost under variable costing = $232,200 + $162,000 = $394,200

Contribution margin per unit = Sales price per unit - Variable production costs per unit = $22 - $12.90 = $9.10

Therefore, total contribution margin = 18,000 units x $9.10 per unit = $163,800

Net income under variable costing = Total contribution margin - Total variable selling and administrative expenses = $163,800 - $162,000 = $1,800

Note that fixed production costs of $1.10 per unit are not considered as product costs under variable costing and are treated as period costs. Therefore, these costs are expensed in full in the period incurred and do not affect net income for the year.

Tim's Tools, a Manufacturer of Cordless Drills, Began Operations This