1. Oxygen, Inc. reports the following information: Units produced 2,500 units Units sold 2,000 units Sales price $200 per unit Direct materials $40 per unit Direct labor $25 per unit Variable manufacturing overhead $20 per unit Fixed manufacturing overhead $90,000 per year Variable selling and administrative costs $15 per unit Fixed selling and administrative costs $75,000 per year Assume that the production costs and sales prices were the same in the previous year. Assume no beginning inventories. Requirements: a) Calculate unit product cost using absorption costing and variable costing. b) Calculate the operating income using absorption costing and variable costing

Solution and Explanation:

a.

Absorption costing

Direct material 40

Direct labor 25

Variable manufacturing overhead 20

Fixed manufacturing overhead (90,000/2,500) 36

Unit product cost $121

Unit product cost using absorption costing = $121

Variable costing

Direct material 40

Direct labor 25

Variable manufacturing overhead 20

Unit product cost $85

Unit product cost using variable costing = $85

b. Absorption costing income statement

Sales (2,000 x 200) 400,000

Cost of goods sold:

Direct material (2,000 x 40) 80,000

Direct labor (2,000 x 25) 50,000

Varoiable manufacturing overhead (2,000 x 20) 40,000

Fixed manufacturing overhead (90,000 x 2,000/2,500 72,000

Cost of goods sold - 242,000

Gross profit 158,000

Operating expense:

Variable selling and administrative expense (2,000 x 15) 30,000

Fixed selling and administrative expense 75,000

Total operating expense - 105,000

Net operating income $53,000

Variable costing income statement

Sales (2,000 x 200) 400,000

Variable cost:

Direct material 80,000

Direct labor 50,000

Varoiable manufacturing overhead 40,000

Variable selling and administrative expense 30,000

Total variable cost - 200,000

Contribution margin 200,000

Fixed cost:

Fixed manufacturing overhead 90,000

Fixed selling and administrative expense 75,000

Total fixed cost - 165,000

Net operating income $35,000