Direct materials $4.00 per unit Direct labor $3.00 per unit Variable manufacturing overhead $2.00 per unit Variable selling and administrative costs $1.00 per unit Fixed manufacturing overhead $25,000 Fixed selling and administrative costs $10,000 Calculate Preferred's net operating income assuming the company uses absorption costing. B. Calculate Preferred's net operating income assuming the company uses absorption costing.

Expert Answers

An illustration of the letter 'A' in a speech bubbles

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

...

See
This Answer Now

Start your 48-hour free trial to unlock this answer and thousands more. Enjoy eNotes ad-free and cancel anytime.

Get 48 Hours Free Access

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.

Approved by eNotes Editorial Team