Question

Tim's Tools, a manufacturer of cordless drills, began operations this year. During this year, the company produced 20,000 units and sold 18,000 units. At year-end the company reported the following income statement using absorption costing:

Sales (18,000 × $30) $540,000
Cost of goods sold (18,000 × $14) 252,000
Gross margin $288,000
Selling and administrative expenses 90,000
Net income $198,000
Production costs per unit total $14, which consists of $12.90 in variable production costs and $1.10 in fixed production costs (based on the 20,000 units produced). 60% of total selling and administrative expenses are variable. Compute net income under variable costing.
a. $307,800
b. $198,000
c. $195,800
d. $288,000
e. $220,000

Answer 1

c. $195,800

Step-by-step explanation:

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

Sales (18,000 × $30) $540,000

Less: Variable production cost (18,000 × $12.90) $232,200

Less: Variable Selling and administrative expenses ($90,000 × 60%) $54,000

Contribution margin $253,800

Less: Fixed production costs (20,000 × $1.1) $22,000

Less: Fixed selling and administrative expenses ($90,000 × 40%) $36,000

Net income $195,800

Since 60% is variable and the remaining 40% is fixed. And, the same is taken for the computation part