Question

Mason Corporation began operations at the beginning of the current year. One of the company’s products, a refrigeration element, sells for $205 per unit. Information related to the current year’s activities follows.

Variable costs per unit:
Direct material	$	15
Direct labor		36
Manufacturing overhead		46
Annual fixed costs:
Manufacturing overhead	$	600,000
Selling and administrative		860,000
Production and sales activity:
Production (units)		24,000
Sales (units)		20,000

Mason carries its finished goods inventory at the average unit cost of production and is subject to a 30 percent income tax rate. There was no work in process at year-end.

2. Compute Mason’s net income for the current year ended December 31.

Answer 1

Calculation of average unit cost of production:

particulars	amount $
Direct materials (24,000 units * 15 $)	360,000
Direct labour (24,000 units * 36 $)	864,000
variable Manufacturing overheads (24,000 units * 46 $)	1,104,000
fixed manufacturing overheads	600,000
Total production cost	2,928,000

* for the calculation production cost the direct expenses related to production is taken into account i.e direct material , direct labor , maufacturing overheads are calculated on the basis of units produced

* fixed manufacturing expenses are always calculated on the units produced

average production cost per unit = $ 2,928,000 / 24000 units

= $ 122

Net income statement of masons for the current year ended December 31

particulars	amount $
sales revenue (20,000 units * $ 205)	4,100,000
less : cost of goods sold ( 20,000 units * $ 122)	2,440,000
gross profit	1,660,000
less: selling and adminstrative expenses	860,000
Net income	800,000
less: tax on income (30%)	240,000
Net income after tax	560,000

cost of goods sold are calculated by multiplying the average unit product cost to the units sold

fixed selling and adminstrative expenses are indirect expenses deducted from gross profit to get the net income