65 PSS Company experienced the following costs in 2011: Direct materials Direct

Question

65 PSS Company experienced the following costs in 2011: Direct materials Direct labor Manufacturing Overhead Costs $4.00/unit $8.00/unit Variable Fixed $2.00/unit $168,000 There are no beginning inventories. During the year the company manufactured 60,000 units and sold 55,000 units. If profit for the year was $124,000 using full costing, what amount would the profit be if the company used variable costing? A. $138,000 B. $124,000 C. $110,000 D. More information is needed to determine the answer

Explanation / Answer

Fixed manufacturing overhead = $168,000

Ending inventory = Units produced - Units sold = 60,000 - 55,000 = 5,000

Fixed manufacturing overhead per unit = $168,000 / 60,000 units = $2.80 per unit

Difference in net income under full costing and variable costing = 5,000 units * $2.80 = $14,000

Profit under variable costing = $124,000 + $14,000 = $138,000

Hence, correct answer is A.$138,000

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