Question

Wind Fall, a manufacturer of leaf blowers, began operations this year. During this year, the company produced 10,000 leaf blowers and sold 8,500. At year-end, the company reported the following income statement using absorption costing: Sales (8,500 × $45) $ 382,500 Cost of goods sold (8,500 × $20) 170,000 Gross margin $ 212,500 Selling and administrative expenses 60,000 Net income $ 152,500 Production costs per leaf blower total $20, which consists of $16 in variable production costs and $4 in fixed production costs (based on the 10,000 units produced). Fifteen percent of total selling and administrative expenses are variable. Compute net income under variable costing.

Answer 1

The net income of the wind fall under variable costing will be $146,500

Step-by-step explanation:

For calculating the net income of the wind fall here what we have to do is, to simply subtract the variable cost and the fixed cost from the sales.

Given information - Sales = $382,500 ( 8500 x $45 )

Units produced = 10,000

Units sold = 8500

Cost of goods sold = $170,000

Gross margin = $212,500

Selling and administrative expenses = $60,000

Net income = $152,500

Production cost per leaf blower is $20 where $16 is in variable production and $ 4 is for fixed production.

First step for calculating the net income under variable costing would be to subtract the variable cost from the total sales which will give us what we call contribution margin.

Contribution margin = Sales - variable cost

we have to see what is the variable cost,

Variable cost = units of leaf blowers sold x variable production cost +

variable selling and administrative expenses

= 8500 x $16 + $60,000 x 15%

= $136,000 + $9,000

= $145,000

Contribution margin = $382,500 - $145,000

= $237,500

Now that we have the contribution margin we will subtract the fixed cost from it to take out the net income

Net income = contribution margin - fixed cost

where fixed cost = fixed production cost + fixed selling and administrative

cost

= units of leaf blower made x fixed production cost +

fixed selling and administrative cost

= 10,000 x 4 + $60,000 x 85%

= $40,000 + $51,000

= $91,000

Net income = $237,500 - $91,000

= $146,500