Question

In: Accounting

Making Company manufactures one product that is sold for $55 per unit in two geographic regions—the...

Making Company manufactures one product that is sold for $55 per unit in two geographic regions—the South and North regions. The following information pertains to the company’s first year of operations in which it produced 20,000 units and sold 17,500 units.

Variable costs per unit:          

Manufacturing:        

    Direct materials. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             $12

    Direct labor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                $7

    Variable manufacturing overhead. . . . . . . . . . . . . . . . . . . .           $1

Variable selling and administrative. . . . . .. . . . . . . . . . . . . . .          $2

Fixed costs per year:

    Fixed manufacturing overhead. . . . . . . . . . . . . . . . . . . . . . .          $400,000

    Fixed selling and administrative expenses. . . . . . . . . . . . . . . .      $248,000

The company sold 12,500 units in the South region and 5,000 units in the North region. It determined that $125,000 of its fixed selling and administrative expenses is traceable to the North region, $75,000 is traceable to the South region, and the remaining $48,000 is a common fixed cost. The company will continue to incur the total amount of its fixed manufacturing overhead costs as long as it continues to produce any amount of its only product.

Required:

What is the company’s total contribution margin under variable costing?

What is the company’s net operating income under variable costing?

Solutions

Expert Solution

  • All working forms part of the answer
  • Requirement 1: Total Contribution margin of the company, along with working

Working

South Region

North Region

TOTAL

A

Units sold

                    20,000

                  17,500

                    37,500

B = A x $ 55

Sales revenue

$    1,100,000.00

$      962,500.00

$    2,062,500.00

Variable costs:

Direct Material

$        240,000.00

$      210,000.00

$        450,000.00

Direct Labor

$        140,000.00

$      122,500.00

$        262,500.00

Variable manufacturing Overhead

$          20,000.00

$        17,500.00

$          37,500.00

Variable selling & admin overheads

$          40,000.00

$        35,000.00

$          75,000.00

C

Total variable cost

$        440,000.00

$      385,000.00

$        825,000.00

D = B - C

Contribution margin

$        660,000.00

$      577,500.00

$    1,237,500.00

Answer = $ 1,237,500

  • Requirement 2: Net Operating Income

Company's Contribution margin

$ 1,237,500.00

Fixed Costs:

   Fixed manufacturing overhead

$        400,000.00

   Fixed selling & admin expense

$        248,000.00

Total Fixed Cost

$      648,000.00

Net Operating Income

$      589,500.00

Answer = $ 589,500


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