Aces,Inc.,a manufacturer of tennis rackets,began operations this year.The company produced 6,000 rackets and sold 4,900.At year-end,the company reported the following income statement using absorption costing. Production costs per tennis racket total $38,which consists of $25 in variable production costs and $13 in fixed production costs (based on the 6,000 units produced).Ten percent of total selling and administrative expenses are variable.Compute net income under variable costing.
A)$194,100
B)$165,500
C)$311,000
D)$240,500
E)$233,000

Question

Aces,Inc.,a manufacturer of tennis rackets,began operations this year.The company produced 6,000 rackets and sold 4,900.At year-end,the company reported the following income statement using absorption costing.  Production costs per tennis racket total $38,which consists of $25 in variable production costs and $13 in fixed production costs (based on the 6,000 units produced).Ten percent of total selling and administrative expenses are variable.Compute net income under variable costing.
A)$194,100 
B)$165,500 
C)$311,000 
D)$240,500 
E)$233,000

Quizplus · Accepted Answer

Under variable costing, only variable manufacturing costs are included in the cost of goods sold. Fixed manufacturing costs are treated as period costs and are expensed in the period they are incurred.

Variable manufacturing cost per racket = $25
Total variable manufacturing cost for 4,900 rackets sold = $25 x 4,900 = $122,500

The fixed manufacturing cost of $13 per racket is not included in the cost of goods sold under variable costing.

Total selling and administrative expenses = 10% of sales = 0.10 x $980,000 = $98,000
Variable selling and administrative expenses = 0.10 x $98,000 = $9,800

Total contribution margin = Sales - Variable manufacturing costs - Variable selling and administrative expenses
= $980,000 - $122,500 - $9,800
= $847,700

Net income under variable costing = Contribution margin - Fixed manufacturing costs - Fixed selling and administrative expenses
= $847,700 - ($13 x 6,000) - ($98,000 x 0.90)
= $847,700 - $78,000 - $88,200
= $681,500

Therefore, the correct answer is B) $165,500.

Aces,Inc,A Manufacturer of Tennis Rackets,began Operations This Year