Fields Cutlery, a manufacturer of gourmet knife sets, produced 20,000 sets and s

Question

Fields Cutlery, a manufacturer of gourmet knife sets, produced 20,000 sets and sold 23,000 units during the current year. Beginning inventory under absorption costing consisted of 3,000 units valued at $66,000 (Direct materials $12 per unit; Direct labor, $3 per unit; Variable Overhead, $2 per unit, and Fixed overhead, $5 per unit.) All manufacturing costs have remained constant over the 2-year period. At year-end the company reported the following income statement using absorption costing:

60% of total selling and administrative expenses are variable. Compute net income under variable costing.

$414,000

$399,000

$529,000

$429,000

$644,000

Sales (23,000 × $45) $1,035,000 Cost of goods sold (23,000 × $22) 506,000 Gross margin $529,000 Selling and administrative expenses 115,000000 Net income     $414,000

Explanation / Answer

Answer: $429,000.

Under variable costing fixed costs of the earlier period are not carried over to the current period, which is 3000*5 = 15000. Hence, profit under variable costing will increase by $15,000 to $429,000The income statement under variable costing will appear as under:

Net Income under variable costing: Sales (23000*45) 1035000 cost of goods sold (23000*17) 391000 Gross contribution margin 644000 Variable selling & admn exp (115000*0.6) 69000 Contribution margin 575000 Less fixed costs: manufacturing (20000*5) 100000 selling % admn (115000*0.4) 46000 146000 Net Income under variable costing: 429000

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