1. Oxygen, Inc. reports the following information: Units produced 2,500 units Units sold 2,000 units Sales price $200 per unit Direct materials $40 per unit Direct labor $25 per unit Variable manufacturing overhead $20 per unit Fixed manufacturing overhead $90,000 per year Variable selling and administrative costs $15 per unit Fixed selling and administrative costs $75,000 per year Assume that the production costs and sales prices were the same in the previous year. Assume no beginning inventories. Requirements: a) Calculate unit product cost using absorption costing and variable costing. b) Calculate the operating income using absorption costing and variable costing

Solution and Explanation:

a.

Absorption costing

Direct material  40

Direct labor  25

Variable manufacturing overhead  20

Fixed manufacturing overhead (90,000/2,500)  36

Unit product cost  $121

Unit product cost using absorption costing = $121

Variable costing

Direct material  40

Direct labor  25

Variable manufacturing overhead  20

Unit product cost  $85

Unit product cost using variable costing = $85

b. Absorption costing income statement

Sales (2,000 x 200)  400,000

Cost of goods sold :    

Direct material (2,000 x 40)  80,000  

Direct labor (2,000 x 25)  50,000  

Varoiable manufacturing overhead (2,000 x 20)  40,000  

Fixed manufacturing overhead (90,000 x 2,000/2,500  72,000  

Cost of goods sold  -242,000

Gross profit  158,000

Operating expense :    

Variable selling and administrative expense (2,000 x 15)  30,000  

Fixed selling and administrative expense  75,000  

Total operating expense  -105,000

Net operating income  $53,000

Variable costing income statement

Sales (2,000 x 200)  400,000

Variable cost :    

Direct material  80,000  

Direct labor  50,000  

Varoiable manufacturing overhead  40,000  

Variable selling and administrative expense  30,000  

Total variable cost  -200,000

Contribution margin  200,000

Fixed cost :    

Fixed manufacturing overhead  90,000  

Fixed selling and administrative expense  75,000  

Total fixed cost  -165,000

Net operating income  $35,000

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