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Chapter 21: Q4SE (page 1168)

Calculating contribution margin and operating income, variable costing

Calculate the contribution margin and operating income for June using variable costing.

Use the following information for Short Exercises S21-4 and S21-5.

Dracut Company reports the following information for June:

Net Sales Revenue $ 755,000 Variable Cost of Goods Sold 240,000 Fixed Cost of Goods Sold 198,000 Variable Selling and Administrative Costs 168,000 Fixed Selling and Administrative Costs 79,000

Short Answer

Expert verified

Answer

Dracut Company鈥檚 gross profit is $347,000 and operating income is $70,000.

Step by step solution

01

Calculation of contribution margin using variable costing

Particulars

Amount

Net sales revenue

$755,000

Less: Variable costs

Variable cost of goods sold

$240,000

Variable selling and administrative costs

$168,000

Contribution margin

$347,000

02

Statement showing operating income

Particulars

Amount

Net sales revenue

$755,000

Less: Variable costs

Variable cost of goods sold

$240,000

Variable selling and administrative costs

$168,000

Contribution margin

$347,000

Less: Fixed costs ($198,000+$79,000)

$277,000

Operating Income

$70,000

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Most popular questions from this chapter

When units produced equal units sold, how does operating income differ between variable costing and absorption costing?

Classifying costs Classify each cost by placing an X in the appropriate columns. The first cost is completed as an example.

Absorption Costing Variable Costing Product Cost Period Cost Product Cost Period cost

  1. Direct materials
  2. Direct labor
  3. Variable manufacturing overhead
  4. Fixed manufacturing overhead
  5. Variable selling and administrative costs
  6. Fixed selling and administrative cost

Question: Preparing variable and absorption costing income statements

Game Store manufactures video games that it sells for \(38 each. The company uses a fixed manufacturing overhead allocation rate of \)3 per game. Assume all costs and production levels are exactly as planned. The following data are from Game Store鈥檚 first two months in business during 2018:

October November

Sales 1,500 units 2,900 units

Production 2,800 units 2,800 units

Variable manufacturing cost per game \( 16 \) 16

Sales commission cost per game 8 8

Total fixed manufacturing overhead 8,400 8,400

Total fixed selling and administrative costs 8,000 8,000 Requirements

1. Compute the product cost per game produced under absorption costing and under variable costing.

2. Prepare monthly income statements for October and November, including columns for each month and a total column, using these costing methods:

a. absorption costing.

b. variable costing.

3. Is operating income higher under absorption costing or variable costing in October? In November? Explain the pattern of differences in operating income based on absorption costing versus variable costing.

4. Determine the balance in Finished Goods Inventory on October 31 and November 30 under absorption costing and variable costing. Compare the differences in inventory balances and the differences in operating income. Explain the differences in inventory balances based on absorption costing versus variable costing.

When units produced exceed units sold, how does operating income differ between variable costing and absorption costing? Why?

In the long run, all costs are controllable. Is this statement true? Why or why not?
See all solutions

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