Question

Krepps Corporation produces a single product. Last year, Krepps manufactured 26,160 units and sold 20,900 units. Production costs for the year were as follows: Direct materials $ 188,352 Direct labor $ 112,488 Variable manufacturing overhead $ 224,976 Fixed manufacturing overhead $ 470,880 Sales totaled $971,850 for the year, variable selling and administrative expenses totaled $108,680, and fixed selling and administrative expenses totaled $190,968. There was no beginning inventory. Assume that direct labor is a variable cost. Under variable costing, the company's net operating income for the year would be:

Answer 1

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.