Question

The Parsons Company experienced the following costs in 2007: Direct materials $4.50/unit Direct labor $8.00/unit Manufacturing Overhead Costs Variable $2.00/unit Fixed $150,000 Selling & Administrative Costs Fixed selling $15,000 Variable selling $1.50/unit Fixed administrative $10,000 During the year the company manufactured 60,000 units and sold 55,000 units. If net income for the year was $114,000 using full costing, what would net income be if the company used variable costing? Assume no beginning inventories. $94,000 $134,000 $126,500 $101,500

Answer 1

$101,500

Step-by-step explanation:

The computation of the net income under the variable costing is shown below:

= Net income + opening inventory - closing inventory

where,

Net income is $114,000

Opening inventory is zero

And, the closing inventory is not given, so we have to compute it

Since the company manufactured 60,000 units and sold 55000 units so, the remaining inventory would be considered as closing units i.e $5,000 (60,000 units - 55,000 units)

Now the fixed manufacturing overhead will be computed for 5,000 units. The calculation is shown below:

= (Fixed manufacturing overhead) × (closing units ÷ number of units manufactured)

= $150,000 × (5,000 units ÷ 60,000 units)

= $12,500

Now put these values to the above formula

So, the value would equal to

= $114,000 + $0 - $12,500

= $101,500