Final answer:
The net operating income under variable costing is calculated by subtracting the variable costs, including cost of goods sold and variable selling and administrative expenses, from sales revenue. For Krepps Corporation, this comes to $443,289.
Step-by-step explanation:
To calculate the net operating income (NOI) under variable costing, we only consider the variable costs (direct materials, direct labor, and variable manufacturing overhead) against the sales revenue. Fixed manufacturing overhead is treated as a period cost and is not included in the calculation of the cost of goods sold under variable costing.
First, we calculate the variable cost of the product:
Direct materials: $188,352
Direct labor: $112,488
Variable manufacturing overhead: $224,976
These variable costs total $525,816.
Since Krepps sold 20,900 units, the cost of goods sold under variable costing is the variable cost per unit multiplied by the number of units sold. Variable cost per unit is $525,816 divided by the 26,160 units produced, equaling $20.09 per unit. The total cost of goods sold is therefore $20.09 times 20,900 units, which is $419,881.
The variable selling and administrative expenses are also considered, adding $108,680 to the variable costs. Fixed costs (both manufacturing and selling/administrative) are not considered in calculating NOI under variable costing.
Therefore, to find the net operating income:
Sales Revenue - Variable Costs (including COGS and variable selling/administrative expenses) = NOI
$971,850 - ($419,881 + $108,680) = $443,289
The company's net operating income under variable costing would be $443,289.