# Direct materials\$4.00 per unitDirect labor\$3.00 per unitVariable manufacturing overhead\$2.00 per unitVariable selling and administrative costs\$1.00 per unitFixed manufacturing overhead\$25,000Fixed selling and administrative costs\$10,000During 2012, Preferred produced 5,000 units out of which 4,600 units were sold for \$30 each.Calculate Preferred's net operating income assuming the company uses absorption costing.

The difference between variable costing and absorption costing is that the fixed manufacturing overhead is included as a product cost under absorption costing.

So, in order to employ absorption costing, we have to compute a per unit production cost, including the fixed manufacturing cost.

The expenses here are:

direct materials: \$4/unit

direct labor: \$3/unit

variable selling and administrative costs: \$ 1/unit

So, because absorption costing includes this \$25,00 cost in the calculation of the per unit cost, and because 5,000 units were sold, the per unit cost using absorption costing is

\$10+\$5 = \$15

fixed selling and administrative costs: \$10,000

The equation for net operating income under absorption costing is:

net sales revenue - costs of good sold - selling and administrative costs = operating income.

So, we have:

(4,600 units * \$30/unit) - (4,600 units * \$15/unit) - (\$10,000 fixed selling and administrative costs) = \$59,000 operating income.