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

During 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 variable costing.

Expert Answers

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Variable costing (also known as direct costing or marginal costing) excludes the fixed manufacturing overhead in its calculation of per unit product cost. Revenue will often be the same under the conditions of variable costing and (its alternative) absorption costing (also known as full costing or traditional costing). The difference will be in how the per unit cost in calculated.

The expenses here 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

The equation for net operating income under variable costing is:

net sales revenue - variable costs - fixed costs = operating income.

The difference between the net operating income and the variable costs is often called the "contribution margin."

So, we have:

(4,600 units * $30/unit) - (5,000 units * $10/unit) - ($25,000 fixed manufacturing overhead + $10,000 fixed selling and administrative costs) = $53,000 operating income.

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