Absorption costing involves distributing fixed manufacturing costs across the units produced. Variable costing, alternatively, considers fixed costs as one line item. Variable costing does feature a unit cost; however, this cost is specific to per-unit manufacturing costs.
The expenses are:
direct materials: $4/unit
direct labor: $3/unit
variable manufacturing overhead: $2/unit
variable selling and administrative costs: $ 1/unit
fixed manufacturing overhead: $25,000
fixed selling and administrative costs: $10,000
Now, the absorption costing method stipulates that the first four categories are attached to the product. This gets a little messy within the confines of this question, as there are no number of units given, so we can't calculate the exact net operating income. However, the difference here is that we will need to divide the variable manufacturing overhead ($25,000) by the number of units.
The result will be the same as it would be with variable costing, as it will just get multiplied by the number of units again; however, the accounting spreadsheet would look different in that single way.
To the $4 + $3 + $2 + $1 = $10/unit (of variable costs) +
selling and administrative expenses: $10,000
Here, selling prices are: direct materials ($4.00 per unit), direct labor ($3.00 per unit), variable manufacturing overhead ($2.00 per unit), and variable selling and administrative costs ($1.00 per unit). The total variable cost is $10 per unit.
The fixed costs are given as follows: fixed manufacturing overhead ($25,000), and fixed selling and administrative costs ($10,000). The total fixed costs are $35,000.
Because this question doesn't feature either the cost of the units sold, nor the number of units sold, we can use these given costs to write an equation for the cost, "m," in terms of units sold, "x." These variables are the variables used to represent the slope, "m" and independent variable, "x" in a y=mx+b form of a linear equation.
So, the profit equation given these total variable costs and total fixed costs is:
(m- $10) * x- $35,000 = net operating income.
Here, "m" represents the sale cost per unit, "x" represents the number of units, and $10 and $35,000 are the variable operating costs and fixed costs, respectively.
The general equation would be slightly different using an absorption costing model, as we would need to change the fixed manufacturing overhead cost from a lump sum of $25,000 to a per-unit cost, and the $10 per unit cost here used here would be adjusted accordingly.