Question

The following data were provided by Rider, Inc, which produces a single product:

Units in beginning inventory 0
Units produced 5,000
Units sold 4,500
Variable costs per unit:
Manufacturing $10
Selling and administrative $4
Fixed costs in total:
Manufacturing $15,000
Selling and administrative $10,000
a. lower than the net operating income under variable costing.b. higher than the net operating income under variable costing.c. the relation between absorption costing and variable costing net operating incomes cannot be determined.d. the same as the net operating income under variable costing.

Answer 1

The correct option is B, higher than the net operating income under variable costing

Step-by-step explanation:

In calculating the net operating profit under variable costing, the fixed manufacturing cost of $15,000 is deducted as a whole in arriving at net profit.

However, under absorption costing method, only the goods sold are charged with their own portion of fixed manufacturing cost totaling $15,000

Fixed under variable costing method=$15,000

fixed cost under absorption costing method=$15,000/5,000*4500=$13500

Since fixed cost is lower under absorption costing method, net profit tends to be higher.