Question

The change in period-to-period operating income when using variable costing can be explained by the change in the
A. Unit sales level multiplied by the unit sales price.
B. Finished goods inventory level multiplied by the unit sales price.
C. Unit sales level multiplied by a constant unit contribution margin.
D. Finished goods inventory level multiplied by a constant unit contribution margin.

Answer 1

The change in period-to-period operating income when using variable costing can be explained by the change in the

A. Unit sales level multiplied by a constant unit contribution margin.

To Explain this Following Assumptions have been taken:

1. Units Sales Price Remians Constant.
2 Unit Variable Cost Remains Constant.
3. Fixed Cost Remains Constant

Now Understand the Following:

Contribution Margin Per Unit : Sale price Per Unit - Variable Cost Per Unit
Operating Income : Contribution - Fixed Cost

In clear words what we are Proving is:

Any Change in Operating Income = Change in Units * Contribution Per Unit

This can be explained throuhg the Following Illustration:

	Year 1	Year2
Sale Price	50	50
Variable Cost Per Unit	10	10
Sales Unit	1000	5000

Sales	50,000	250,000
Less: Variable Cost	(10,000)	(50,000)
Contribution	40,000	200,000
Less: Fixed Cost	10,000	10,000
Operating Income	30,000	190,000

Change in Operating Income = 190,000 - 30,000 = 160,000
Change in Units * Contribution Per Unit = (5000 - 1000) * 40 = 160,000

In Variable Costing Method, Variable Cost changes with the Change in Number of Units means it is Directly Proportional. Therefore the Contribution Margin remians constant.

As Fixed Cost remians same whatever is the Level of Sales , So After the Break Even Point is Achieved any Change in Opearting Income will be equal to Change in Leavel of Units * Contribution Margin Per Unit.