Question

Wheels of Fortune is a bicycle manufacturing company based in Florida, USA. Summarized below are selling price, variable costs and expenses per unit and fixed costs (manufacturing overhead and selling & administrative expenses).

Selling Price $210

Variable Costs per unit Direct Materials $30

Direct Labor 50

Variable Manufacturing Overhead 25

Variable Selling & Administrative 5

Fixed Manufacturing Overhead $15,000

Fixed Selling & Administrative Expenses 5,000

Sales in units 250

Production in units 300

1. Net operating income under variable costing method.

2. Break-even point in units.

3. Break-even point in total sales ($)

4. Net operating income under absorption costing

5. Fixed manufacturing overhead in ending inventory

Answer 1

Part 1	Income Statement as per Variable Costing
	Sales		$           52,500
	Variable cost of goods sold:
	Variable cost of goods manufactured(300*$105)	$                31,500
	Inventory, Closing(50*$105)	$                  5,250
	Total Cost of goods sold		$           26,250
	Manufacturing Margin		$           26,250
	Variable selling and administrativ expenses(250*$5)		$             1,250
	Contribution Margin		$           25,000
	Fixed Costs:
	Fixed Manufacturing Costs	$                15,000
	Fixed Selling and administrative expenses	$                  5,000
	Total Fixed Costs		$           20,000
	Operating Income		$             5,000
	Computation of Unit Product cost
	Direct Materials per unit	$                  30.00
	Direct labor per unit	$                  50.00
	Variable Manufacturing overhead per unit	$                  25.00
	Unit Product Costs	$                105.00
	Contribution Margin per unit =$25000 / 250 units =$100
Part 2	Break-even Point in units =$20,000 / $100 =200 units
Part 3	Break-even Point in Sales =200*$210 =$42,000
Part 4	Income Statement as per Absorption Costing
	Sales		$           52,500
	Less:Cost of goods sold:
	Cost of goods manufactured(Note)	$                46,500
	Less:Closing Inventory(50*$155)	$                  7,750	$           38,750
	Gross Profit		$           13,750
	Less:Selling and admin expenses[$5,000+(250*$5)]		$             6,250
	Net Operating Income / (Loss)		$             7,500
	Computation of Unit Product cost(Note)
	Units Produced	300	units
	Direct Materials per unit	$                  30.00
	Direct labor per unit	$                  50.00
	Variable Manufacturing overhead per unit	$                  25.00
	Fixed Manufacturing overhead per unit($15,000/300)	$                  50.00
	Cost of goods manufactured per unit	$                155.00
	Total Cost of goods manufactured	$                46,500
Part 5	Reconciliation Statement
	Net Income under Variable costing	$                  5,000
	Add:Fixed Manufacturing Overhead in Ending Inventory	$                  2,500
	($15,000/300 units)*50 units
		$                  7,500