21 Krugman Company manufactures and sells one product. The following information

ID: 2597776 • Letter: 2

Question

21 Krugman Company manufactures and sells one product. The following information pertains to cac rtain first two years of operations. Variable cost per unit: Direct materials S89 per unit Fixed costs per year Direct labor Fixed manufacturing overhead Fixed selling and administrative $1,344,000 $3,472,000 $1,782,000 The company does not incur any variable manufacturing overhead costs or variable selling and administrative expenses. The selling price of the company's product is $227 per unit. Production (units) Sale (units) Year l 56,000 53,000 Year 2 56,000 59,000 The company is considering using either super-variable costing or a variable costing system that assigns direct labot cost equally to each unit that is produced. Which of th (NOI) in the first year? e follow ing statements is true regarding the net operating income A. Variable costing NOI exceeds super-variable costing NOI by B. Super-variable costing NOI exceeds variable costing NOl by C. Variable costing NOI exceeds super-variable costing NOI by D. Super-variable costing NOI exceeds variable costing NOI by $72,000 $72,000 $258,000 $258,000 E. None of the above

Explanation / Answer

Solution:

Direct labor cost per unit = $1344000/56000 = $24 per unit

Variable cost under super variable costing = $89 per unit

Fixed Cost under super variable costing = $1,344,000 + $3,472,000 + $1,782,000 = $6,598,000

Variable cost under variable costing = 89 + 24 = $112 per unit

Fixed Cost under variable costing = $3,472,000 + $1,782,000 = $5,254,000

Computation of Profit - Year 1

Particulars

Super Variable Costing

Variable Costing

Sales price per unit

$227.00

Variable cost per unit

$89.00

$113.00

Contribution per unit

$138.00

$114.00

Sales Volume

53000

Contribution

$7,314,000.00

$6,042,000.00

Fixed Cost

$6,598,000.00

$5,254,000.00

Profit

$716,000.00

$788,000.00

Hence from above table, we can say that Variable costing NOI exceeds Super variable costing NOI by $72,000