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 $ 89 Fixed costs per year: Direct labor $ 616,000 Fixed manufacturing overhead $ 3,472,000 Fixed selling and administrative expenses $ 1,782,000 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 56,000 units and sold 54,000 units. The company’s only product is sold for $227 per unit. The company is considering using either super-variable costing or an absorption costing system that assigns $11 of direct labor cost and $62 of fixed manufacturing overhead to each unit that is produced. Which of the following statements is true regarding the net operating income in the first year? Multiple Choice Super-variable costing net operating income exceeds absorption costing net operating income by $146,000. Absorption costing net operating income exceeds super-variable costing net operating income by $124,000. Super-variable costing net operating income exceeds absorption costing net operating income by $124,000. Absorption costing net operating income exceeds super-variable costing net operating income by $146,000.

Answer 1

2.Absorption costing net operating inocme exceeds super variable costing net operating income by $124,000.

first let us calculate the net operating income using super varible costing:

sales revenue ($227 * 54,000 units)	$12,258,000
less: variable costs [($89 +$11) per unit *54,000 units]	(5,400,000)
contribution	$6,858,000
less fixed manufacturing costs	(3,472,000)
less: fixed selling and administrative expenses	(1,782,000)
net income	$1,604,000

absorption costing:

sales revenue ($227* 54,000)	$12,258,000
less: cost of goods sold (see note)	(10,530,000)
net income	$1,728,000

cost of goods sold:

variable costs [($89+$11 =>$100)*54,000]	$5,400,000
fixed manufacturing overhead ($3,472,000 / 56,000)*54,000	3,348,000
fixed selling and administrative expenses	1,782,000
TOtal	$10,530,000

difference between net income of variable costing and absorption costing

=>1,728,000 - 1,604,000

=>$124,000.