Question

In: Accounting

Exercise C Dancing Diva produced 115,000 units this year and sold 110,000 units. The following costs...

Exercise C Dancing Diva produced 115,000 units this year and sold 110,000 units. The following costs were incurred:

Direct materials $517,500

Direct labor $1,840,000

Variable overhead $805,000

Fixed overhead $400,000

Sales Commissions $550,000

Fixed Selling Expenses $80,000

Fixed Administrative Expenses $300,000

Each unit sells for $40 each. Calculate the production cost per unit under the VARIABLE costing method and prepare a Contribution Margin Income Statement for the year ended December 31.

Solutions

Expert Solution

Calculation of the production cost per unit under the VARIABLE costing method

Variable costs of production;

Amount

Direct Materials

$517,500

Direct Labor

$1,840,000

Variable Overhead

$805,000

Total Product Cost

$3,162,500 (a)

Total Units Produced

115000 (b)

Production cost per unit (a)/(b)

$27.50

Explanation; Under variable costing method, company takes all variable manufacturing cost which increase with the volume. This does not include any other variable cost like; sales commission, variable selling expense, etc.

Preparation of a Contribution Margin Income Statement for the year ended December 31.

Sales (110,000 x $40 per unit)

$ 4,400,000

Variable Costs:

Production cost (110,000 x $27.50 per unit)

30,25,000

Sales Commission (Selling expenses)

5,50,000

Total variable costs

35,75,000

Contribution Margin

8,25,000

Fixed Costs:

Fixed overhead

4,00,000

Fixed Selling expenses

80,000

Fixed Administrative expenses

3,00,000

Total Fixed expenses

  780,000

Net Operating Income

   

$45,000

Explanation; Under variable costing method, company is preparing Contribution Margin Income statement for internal purpose. In this statement, “production cost” is calculated on the basis of the “Production cost per unit ( $27.50)” , which calculated under Variable costing. “Sales commission” is taken as variable cost, which varies with the volume of product.


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