In: Accounting
Diego Company manufactures one product that is sold for $80 per unit. The following information pertains to the company’s first year of operations in which it produced 40,000 units and sold 35,000 units.
Variable costs per unit: | |||
Manufacturing: | |||
Direct materials | $ | 24 | |
Direct labour | $ | 14 | |
Variable manufacturing overhead | $ | 2 | |
Variable selling and administrative | $ | 4 | |
Fixed costs per year: | |||
Fixed manufacturing overhead | $ | 800,000 | |
Fixed selling and administrative expenses | $ | 496,000 | |
Required:
1. What is the unit product cost under variable costing?
2. What is the unit product cost under absorption costing?
3. What is the company’s total contribution margin under variable costing?
4. What is the company’s net operating income under variable costing?
5. What is the company’s total gross margin (loss) under absorption costing?
6. What is the company’s net operating income (loss) under absorption costing?
7. What is the amount of the difference between the variable costing and absorption costing net operating incomes (losses)?
8.
1. What is the company’s break-even point in unit sales?
2. Is it above or below the actual sales volume?
Below
Above
9. What would have been the company’s variable costing net operating income (loss) if it had produced and sold 35,000 units?
8. What would have been the company’s absorption costing net operating income (loss) if it had produced and sold 35,000 units?
1.
Direct material | $24 |
Direct labor | 14 |
Variable manufacturing overhead | 2 |
Unit product costs | $40 |
2.
Direct material | $24 |
Direct labor | 14 |
Variable manufacturing overhead | 2 |
Fixed manufacturing overhead ($800,000/40,000) | 20 |
Unit product costs | $60 |
3.
Total contribution margin = Sales - Total variable costs
Total contribution margin = $2,800,000(35,000*$80) - 1,540,000(35,000*$44)
Total contribution margin = $1,260,000
4.
Net operating income = Total contribution margin - Total fixed costs
Net operating income = $1,260,000 - $1,296,000
Net operating loss = -$36,000
5.
Sales | $2,800,000 |
Less: Cost of goods sold (35,000*$60) | 2,100,000 |
Gross margin | $700,000 |
6.
Gross margin | $700,000 |
Less: Selling and administrative costs (35,000*$4)+$496,000 | 636,000 |
Net operating income | $64,000 |
7. Difference between variable and absorption costing net operating income:
Variable costing net operating income | -$36,000 |
Add: Fixed manufacturing overhead deferred in ending inventory (5,000*$20) | 100,000 |
Absorption costing net operating income | $64,000 |
8.
Break even point in unit sales = Total fixed costs / Contribution margin per unit
Break even point in unit sales = $1,296,000 / $44 = 29,455 units
It is below the actual sales volume.
9.
Variable Costing Income Statement | |
Sales | $2,800,000 |
Less: Variable costs (35,000*$44) | 1,540,000 |
Contribution margin | 1,260,000 |
Less; Fixed costs | 1,296,000 |
Net operating loss | -$36,000 |
10.
Absorption Costing Income Statement | |
Sales | $2,800,000 |
Less: Cost of goods sold (35,000*$40)+$800,000 | 2,200,000 |
Gross margin | 600,000 |
Less: Selling and administrative costs (35,000*$4)+$496,000 | 636,000 |
Net operating loss | -$36,000 |