Triple M Company had the following data for the month:
Fixed overhead is $4,000 per month, which is applied to production on the basis of normal activity of 2,000 units. During the month, 2,000 units were produced. Loring started the month with 300 units in beginning inventory, with unit product cost equal to this month's unit product cost. A total of 2,100 units were sold during the month at price of $14 per unit. Selling and administrative expense for the month, all fixed, totalled $3,600.
$\begin{array}{lr}
\text { Variable costs per unit: } & \
\text { Direct materials } & \$ 4.00 \
\text { Direct labour } & 3.20 \
\text { Variable overhead } & 1.00 \
\text { Variable selling expenses } & 0.40
\end{array}$
-Refer to the Figure.What is the operating income under variable costing?
A)($540)
B)$3,540
C)$3,740
D)$7,980

Question

Triple M Company had the following data for the month:
Fixed overhead is $4,000 per month, which is applied to production on the basis of normal activity of 2,000 units. During the month, 2,000 units were produced. Loring started the month with 300 units in beginning inventory, with unit product cost equal to this month's unit product cost. A total of 2,100 units were sold during the month at price of $14 per unit. Selling and administrative expense for the month, all fixed, totalled $3,600.
 $\begin{array}{lr}
\text { Variable costs per unit: } & \
\text { Direct materials } & \$ 4.00 \
\text { Direct labour } & 3.20 \
\text { Variable overhead } & 1.00 \
\text { Variable selling expenses } & 0.40
\end{array}$
-Refer to the Figure.What is the operating income under variable costing?
A)($540)
B)$3,540
C)$3,740
D)$7,980

Quizplus · Accepted Answer

Variable costing includes only variable production costs in the cost of goods sold. Fixed overhead is treated as a period cost and deducted entirely from revenue in the period incurred. To calculate operating income under variable costing, we first calculate the variable cost per unit, then the total variable cost for units sold, and subtract this along with the fixed costs from the total sales revenue.Variable cost per unit = Direct materials + Direct labor + Variable overhead = $4.00 + $3.20 + $1.00 = $8.20Total variable cost for units sold = Variable cost per unit * Units sold = $8.20 * 2,100 = $17,220Total sales revenue = Selling price per unit * Units sold = $14 * 2,100 = $29,400Total fixed costs = Fixed overhead + Fixed selling and administrative expense = $4,000 + $3,600 = $7,600Operating income under variable costing = Total sales revenue - Total variable cost for units sold - Total fixed costs = $29,400 - $17,220 - $7,600 = $4,580However, the correct calculation for operating income under variable costing should consider all relevant variable costs, including variable selling expenses, which were not included in the initial calculation. Let's correct this oversight:Variable selling expenses for units sold = Variable selling expense per unit * Units sold = $0.40 * 2,100 = $840Correct total variable cost for units sold = $17,220 (previous total variable cost) + $840 (variable selling expenses) = $18,060Correct operating income under variable costing = Total sales revenue - Correct total variable cost for units sold - Total fixed costs = $29,400 - $18,060 - $7,600 = $3,740Therefore, the correct answer is $3,740, which corresponds to option C.

Triple M Company Had the Following Data for the Month