Red River Company sells its product for $12,000 per unit. Variable costs per unit are: Manufacturing overhead -$8,000
Selling and administrative -$150
Fixed costs are:
Manufacturing overhead -$30,000
Selling and administrative -$40,000
Red River had no beginning inventory at January 1, 2010. Production was 20 units each year in 2010, 2011, and 2012. Sales were 20 units in 2010, 16 units in 2011, and 24 units in 2012.
Income/(Loss) under variable costing for 2012 is:
A)$12,000.
B)$16,400.
C)$40,400.
D)$48,000
E)$22,400.

Question

Quizplus · Accepted Answer

To calculate income under variable costing, we need to take into account only variable costs, which are manufacturing overhead and selling and administrative costs. We also need to calculate the contribution margin per unit, which is the selling price minus variable costs.

Contribution margin per unit: 
Selling price - variable costs 
= $12,000 - $8,150 
= $3,850

Income under variable costing for each year:

2010: 
Sales revenue ($12,000 x 20 units) = $240,000 
Variable costs ($8,150 x 20 units) = $163,000 
Contribution margin = $77,000

2011: 
Sales revenue ($12,000 x 16 units) = $192,000 
Variable costs ($8,150 x 16 units) = $130,400 
Contribution margin = $61,600

2012: 
Sales revenue ($12,000 x 24 units) = $288,000 
Variable costs ($8,150 x 24 units) = $195,600 
Contribution margin = $92,400

Therefore, the income under variable costing for 2012 is $92,400 - ($30,000 + $40,000) = $22,400.

The best choice is E.

Red River Company Sells Its Product for $12,000 Per Unit