Wilson Decorative Home Goods produces and sells a decorative pillow for $97.50 p

Question

Wilson Decorative Home Goods produces and sells a decorative pillow for $97.50 per unit. In the firs month of operation, 2,000 units were produced and 1,750 units were sold. Actual fixed costs are the same as the amount budgeted for the month.

Other information for the month includes:

Variable manufacturing costs: $22.10 per unit

Variable marketing costs: $3.90 per unit sold

Fixed manufacturing costs: $13.00 per unit produced

Administrative expenses, all fixed: $39,000 total

Ending inventories:

Direct materials: 0

WIP: 0

Finished Goods: 250 units

1. What is the product cost per unit using variable costing?

2. What is the product cost per unit using absorption costing?

3. What is the total contribution margin using variable costing?

4. What is the net operating income using variable costing?

5. What is the net operating income using absorption costing?

6. Reconcile the difference between the operating income using absorption costing and the operating income using variable costing.

Explanation / Answer

1. Product cost per unit using variable costing = 22.10 + 3.90 = $ 26

2. Product cost per unit using absorption costing = 22.10 + 13 = $ 35.10

Variable costing Income statement

Absorption costing income statement:

Statement of reconciliation:

$ Sales revenue (1,750 x 97.50) 170,625 Less variable costs ( 1,750 x 26) 45,500 Contribution margin 125,125 Less fixed costs: Manufacturing 26,000 Administrative 39,000 65,000 Net operating income 60,125

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