Question

Wang Company provides the following information for their first year of operation:

   Sales                         5,000 units @ $10                   Variable production costs per unit:     

   SG&A costs:                                                                        Direct materials          $2

     Fixed                    $1,000                                                 Direct labor                 $2

      Variable                $1 per unit                                           Var MOH                    $1

Fixed MOH             $7,500                                     Production                              7,500 units

   (T or F) If Wang uses variable costing, operating income will be $11,500.

True

False

Answer 1

Answer- TRUE- If Wang uses variable costing, operating income will be $11,500.

Explanation-

WANG COMPANY
Income statement (Using variable costing approach)
Particulars			Amount
			$
Sales (a)	5000 units*$10 per unit		50000
Less:- Variable cost of goods sold (b)
Opening inventory
Add:- Variable cost of goods manufactured		37500
Direct materials	7500 units*$2 per unit	15000
Direct labor	7500 units*$2 per unit	15000
Variable manufacturing overhead	7500 units*$1 per unit	7500
Variable cost of goods available for sale		37500
Less:- Closing inventory	2500 units*$5 per unit	12500	25000
Gross contribution margin C= a-b			25000
Less:-Variable selling & administrative exp.	5000 units*$1 per unit		5000
Contribution margin			20000
Less:- Fixed costs
Manufacturing overhead			7500
Selling & administrative exp.			1000
Net Income			11500

Where- Unit product cost under Variable costing:-Direct materials + Direct Labor+ Variable manufacturing overhead

= $2+$2+$1

= $5 per unit