A business operated at 100% of capacity during its first month and incurred the

Question

A business operated at 100% of capacity during its first month and incurred the following costs: Production costs (10,000 units): Direct materials $140,000 Direct labor 40,000 Variable factory overhead 20,000 Fixed factory overhead 4,000 $204,000 Operating expenses: Variable operating expenses $ 34,000 Fixed operating expenses 2,000 36,000 If 2,000 units remain unsold at the end of the month and sales total $300,000 for the month, what would be the amount of income from operations reported on the variable costing income statement?

Explanation / Answer

Units produced = 10,000 units

Variable manufacturing costs = Direct material + Direct labor + Variable factory overhead = $140,000 + $40,000 + $20,000 = $200,000

Unit product cost as per variable costing = Variable manufacturing costs/Units produced = $200,000/10,000 units = $20 per unit

Unsold units at the end of year = 2,000

Units sold = Units produced - Unit unsold = 10,000 - 2,000 = 8.000 units

Cost of goods sold = Units sold * Unit product cost = 8,000 units * $20 per unit = $160,000

Sales = $300,000

Contribution margin = Sales - Cost of goods sold - Variable operating expenses = $300,000 - $160,000 - $34,000 = $106,000

Income from operations = Contribution margin - Fixed factory overhead - fixed operating expenses

Income from operations = $106,000 - $4,000 - $2,000 = $100,000

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