Bella Ltd has operated for 2 years. During that time it produced 1,000 units in year 1 and 800 in year 2, while sales were 800 units in year 1 and 900 in year 2. Variable production costs were $8 per unit during both years. The company uses last-in, first-out (LIFO) for inventory costing. The absorption costing income statements for these 2 years were: Operating profit for year 1 using variable costing would be
A) $1,600
B) $(2,800)
C) $2,200
D) $400

Question

Quizplus · Accepted Answer

To calculate the operating profit using variable costing, we need to subtract only the variable costs (i.e., the cost of goods sold) from the sales revenue.

Year 1: 
Operating profit using variable costing = revenue - variable costs 
= (800 units sold x $12 per unit) - (1,000 units produced x $8 per unit) 
= $9,600 - $8,000 
= $1,600

Therefore, the correct answer is D.

Bella Ltd Has Operated for 2 Years