Octagonal Company has the following information for 2014: There were no beginning inventories.
What is the net income for Octagonal using the variable costing method?
A) $480,000
B) $412,000
C) $1,200,000
D) $600,000

Question

Octagonal Company has the following information for 2014:  There were no beginning inventories.
What is the net income for Octagonal using the variable costing method?
A) $480,000 
B) $412,000 
C) $1,200,000 
D) $600,000

Quizplus · Accepted Answer

Since there were no beginning inventories, the variable costing and absorption costing methods will produce the same net income. Using the absorption costing method, the net income is $480,000. However, since the question specifically asks for the net income using the variable costing method, we need to subtract the fixed manufacturing overhead of $68,000 per unit (total fixed overhead of $3,400,000 divided by 50,000 units produced) from the contribution margin per unit of $40 per unit (total contribution margin of $2,000,000 divided by 50,000 units produced). This gives us a net income of $1,960,000, which is then adjusted for the variable selling and administrative expenses of $1,548,000 (total variable expenses of $31 per unit multiplied by 50,000 units produced). Thus, the net income using the variable costing method is $412,000 ($1,960,000 – $1,548,000).

Octagonal Company Has the Following Information for 2014: There