Farris Corporation produces a single product. The following is a cost structure

Question

Farris Corporation produces a single product. The following is a cost structure applied to its first year of operations.

Sales price $15 per unit
Variable costs:
SG&A $2 per unit
Production $4 per unit
Fixed costs (total cost incurred for the year):
SG&A $14,000
Production $20,000

During the first year, Farris Corporation manufactured 5,000 units and sold 3,800. There was no beginning or ending work-in-process inventory.
a. How much income before income taxes would be reported if Farris Corporation uses absorption costing?
b. How much income before income taxes would be reported if variable costing was used?

Explanation / Answer

a) absorption cost: income = 3800*15 -(3800*(4+2)) = 57000- 22800 = $44200 b) if variable cost: income =3800*15 - 3800*2 = 57000- 7600 =$49400

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