Question

Letcher Corporation manufactures and sells one product. The following information pertains to the company’s first year of operations:

Variable costs per unit:
Direct materials	$	94
Fixed costs per year:
Direct labor	$	709,200
Fixed manufacturing overhead	$	4,373,400
Fixed selling and administrative expenses	$	2,244,600

The company does not have any variable manufacturing overhead costs or variable selling and administrative expenses. During its first year of operations, the company produced 59,100 units and sold 57,000 units. The company’s only product is sold for $241 per unit.

The company is considering using either super-variable costing or a variable costing system that assigns $12 of direct labor cost to each unit that is produced. Which of the following statements is true regarding the net operating income in the first year?

Multiple Choice

• Variable costing net operating income exceeds super-variable costing net operating income by $155,400.

• Super-variable costing net operating income exceeds variable costing net operating income by $155,400.

• Variable costing net operating income exceeds super-variable costing net operating income by $25,200.

• Super-variable costing net operating income exceeds variable costing net operating income by $25,200.

Answer 1

Ans)	Variable costing Net Operating Income exceeds super variable costing net operating income by $25200.
	Unit Product Cost
		Variable costing	Super variable costing
	Direct Material	$                            94.00	$                                  94.00
	Direct Labor=($709200/59100)	$                            12.00
		$                          106.00	$                                  94.00
	Income Statement
		Variable costing	Super variable costing
	Sales Revenue(57000*$240)	$          1,36,80,000.00	$                1,36,80,000.00
	Less: Variable cost
	Direct Material	$              53,58,000.00	$                    53,58,000.00
	Direct Labor	$                6,84,000.00
	Total Variable cost	$              60,42,000.00	$                    53,58,000.00
	Contribution Margin	$              76,38,000.00	$                    83,22,000.00
	Less: Fixed Cost
	Direct Labor		$                      7,09,200.00
	Fixed Manufacturing cost	$              43,73,400.00	$                    43,73,400.00
	Fixed Selling and Administrative Expense	$              22,44,600.00	$                    22,44,600.00
	Total Fixed Cost	$              66,18,000.00	$                    73,27,200.00
	Net Operating Income	$              10,20,000.00	$                      9,94,800.00
	Difference in Net Operating Income of two methods=($1020000-$994800)	$                          25,200.00
	Under Variable costing Product cost=Direct Material+Direct Labor+Variable Manufacturing Overhead
	Under Super Variable costing Product Cost=Direct Material
	Under Variable costing Period cost=Fixed Manufacturing Overhead+Fixed Selling and Administrative Expenses
	Under Super Variable costing Period Cost=Direct Labor+Fixed Manufacturing cost+Fixed Selling and Administrative cost