The following data relate to Lobo Corporation for the year just ended: $\begin{array} { | l | r | }
\hline \text { Sales revenue } & \$ 750,000 \
\hline \text { Cost of goods sold: } & \
\hline \text { Variable portion } & 370,000 \
\hline \text { Fixed portion } & 110,000 \
\hline \text { Variable selling and administrative cost } & 50.000 \
\hline \text { Fixed selling and administrative cost } & 75.000 \
\hline
\end{array}$ Which of the following statements is correct?
A)Lobo's variable-costing income statement would reveal a gross margin of $270,000.
B)Lobo's variable costing income statement would reveal a contribution margin of $330,000.
C)Lobo's absorption-costing income statement would reveal a contribution margin of $330,000.
D)Lobo's absorption costing income statement would reveal a gross margin of $330,000.
E)Lobo's absorption-costing income statement would reveal a gross margin of $145,000

Question

The following data relate to Lobo Corporation for the year just ended: $\begin{array} { | l | r | } 
\hline \text { Sales revenue } & \$ 750,000 \
\hline \text { Cost of goods sold: } & \
\hline \text { Variable portion } & 370,000 \
\hline \text { Fixed portion } & 110,000 \
\hline \text { Variable selling and administrative cost } & 50.000 \
\hline \text { Fixed selling and administrative cost } & 75.000 \
\hline
\end{array}$ Which of the following statements is correct?
A)Lobo's variable-costing income statement would reveal a gross margin of $270,000.
B)Lobo's variable costing income statement would reveal a contribution margin of $330,000.
C)Lobo's absorption-costing income statement would reveal a contribution margin of $330,000.
D)Lobo's absorption costing income statement would reveal a gross margin of $330,000.
E)Lobo's absorption-costing income statement would reveal a gross margin of $145,000

Quizplus · Accepted Answer

In variable costing, only variable costs (both manufacturing and non-manufacturing) are considered as part of the product cost. Fixed costs are treated as period costs and are expensed out in the period incurred. Therefore, the variable costing contribution margin can be calculated as:

Sales revenue - Variable costs = Contribution margin
$750,000 - ($370,000 + $50,000) = $330,000

In absorption costing, both variable and fixed costs (both manufacturing and non-manufacturing) are considered as part of the product cost. Therefore, the absorption costing gross margin can be calculated as:

Sales revenue - Cost of goods sold = Gross margin
$750,000 - ($370,000 + $110,000) = $270,000

So, option B is the correct answer.

The Following Data Relate to Lobo Corporation for the Year