Question

5. Company IR currently uses variable costing in presenting its income statement. In March 2020, the company produced 50,000 units and sold 45,000 units. The company sells its products at $100 per unit. The following are the costs incurred during March:

• Direct materials - $30 per unit

• Direct labor - $20 per unit

• Manufacturing overhead - $20 per unit (30% is fixed cost)

• Total period cost - $20,000 (30% is fixed cost)

Assuming there were no ending inventories in February 2020, what would be the net operating income of Company IR?

$1,300,000

$1,330,000

$1,800,000

$1,830,000

Answer 1

The net operating income for Company IR is calculated by subtracting the total variable costs of goods sold and the variable period costs from the total revenue, resulting in a net operating income of $1,606,000.

Step-by-step explanation:

To calculate the net operating income of Company IR using variable costing, we need to consider the variable costs of the units sold and the period costs, excluding any fixed manufacturing overhead from inventory calculations. Since 45,000 units were sold at $100 each, the total revenue is 45,000 units x $100/unit = $4,500,000. The variable costs are direct materials, direct labor, and variable manufacturing overhead (70% of the $20/unit), which sum to $30 + $20 + ($20 x 70%) = $64 per unit. The cost for the 45,000 sold units is then 45,000 units x $64/unit = $2,880,000. The total period costs are $20,000, of which only the variable portion (70%) should be considered, which is $14,000. Subtracting these costs from the total revenue gives the net operating income.

Net operating income is calculated as follows:

• Total revenue: $4,500,000
• - Total variable costs of goods sold: $2,880,000
• - Variable period costs: $14,000
• = Net operating income: $1,606,000

Therefore, although the initial options did not contain the correct answer based on our calculations, the net operating income would be $1,606,000.