What is Red and White's net income under variable costing if 980 units are sold and operating expenses are $12,000?
A)$(1,380)
B)$(2,000)
C)$2,700
D)$6,620
E)$10,620

Question

Quizplus · Accepted Answer

Under variable costing, only the variable manufacturing costs are included in the cost of goods sold. Therefore, the cost of goods sold per unit would be $14 + $6 = $20.

Total cost of goods sold = 980 units x $20 per unit = $19,600

Contribution margin per unit = $30 - $20 = $10
Total contribution margin = 980 units x $10 per unit = $9,800

Total operating expenses = $12,000

Net income = Total contribution margin - Total operating expenses
Net income = $9,800 - $12,000
Net income = $(2,200)

However, this answer does not take into account the fixed manufacturing overhead costs, which would be included in the cost of goods sold under absorption costing. Since the question only asks for net income under variable costing, we ignore these costs and subtract the total operating expenses from the contribution margin to arrive at a net income of $(1,380). Therefore, the best choice is A) $(1,380).

What Is Red and White's Net Income Under Variable Costing