Letcher Corporation manufactures and sells one product. The following information pertains to the company's first year of operations: The company does not have any variable manufacturing overhead costs or variable selling and administrative expenses. During its first year of operations, the company produced 44,700 units and sold 43,200 units. The company's only product is sold for $183 per unit.The company is considering using either super-variable costing or a variable costing system that assigns $21 of direct labor cost to each unit that is produced. Which of the following statements is true regarding the net operating income in the first year?
A) Variable costing net operating income exceeds super-variable costing net operating income by $109,500.
B) Super-variable costing net operating income exceeds variable costing net operating income by $109,500.
C) Variable costing net operating income exceeds super-variable costing net operating income by $31,500.
D) Super-variable costing net operating income exceeds variable costing net operating income by $31,500.

Question

Letcher Corporation manufactures and sells one product. The following information pertains to the company's first year of operations:  The company does not have any variable manufacturing overhead costs or variable selling and administrative expenses. During its first year of operations, the company produced 44,700 units and sold 43,200 units. The company's only product is sold for $183 per unit.The company is considering using either super-variable costing or a variable costing system that assigns $21 of direct labor cost to each unit that is produced. Which of the following statements is true regarding the net operating income in the first year?
A) Variable costing net operating income exceeds super-variable costing net operating income by $109,500. 
B) Super-variable costing net operating income exceeds variable costing net operating income by $109,500. 
C) Variable costing net operating income exceeds super-variable costing net operating income by $31,500. 
D) Super-variable costing net operating income exceeds variable costing net operating income by $31,500.

Quizplus · Accepted Answer

Under super-variable costing, direct materials cost is treated as a variable cost and direct labor is treated as a fixed cost. Therefore, the cost per unit under super-variable costing is $148 ($127 of DM + $21 of DL). The total cost of goods sold under super-variable costing is $6,384,000, and the net operating income is $2,745,600.

Under variable costing, only direct materials cost is treated as a variable cost. Direct labor is treated as a period cost and is expensed in the period it is incurred. Therefore, the cost per unit under variable costing is $127 (of DM only). The total cost of goods sold under variable costing is $5,468,400 ($127 x 44,700), and the net operating income is $2,714,100.

The difference in net operating income between the two systems is $31,500 ($2,745,600 - $2,714,100). Therefore, the correct answer is C) Variable costing net operating income exceeds super-variable costing net operating income by $31,500.

Letcher Corporation Manufactures and Sells One Product