Harris Corporation produces a single product.Last year, Harris manufactured 17, 000 units and sold 13, 000 units.Production costs for the year were as follows: Sales were $780, 000 for the year, variable selling and administrative expenses were $88, 400, and fixed selling and administrative expenses were $170, 000.There was no beginning inventory.Assume that direct labor is a variable cost. Under variable costing, the company's net operating income for the year would be:
A)$60, 000 higher than under absorption costing
B)$108, 000 higher than under absorption costing
C)$108, 000 lower than under absorption costing
D)$60, 000 lower than under absorption costing

Question

Harris Corporation produces a single product.Last year, Harris manufactured 17, 000 units and sold 13, 000 units.Production costs for the year were as follows:  Sales were $780, 000 for the year, variable selling and administrative expenses were $88, 400, and fixed selling and administrative expenses were $170, 000.There was no beginning inventory.Assume that direct labor is a variable cost. Under variable costing, the company's net operating income for the year would be:
A)$60, 000 higher than under absorption costing 
B)$108, 000 higher than under absorption costing 
C)$108, 000 lower than under absorption costing 
D)$60, 000 lower than under absorption costing

Quizplus · Accepted Answer

Units in ending inventory = Units in beginning inventory + Units produced - Units sold
= 0 units + 17, 000 units - 13, 000 units = 4, 000 units
Fixed manufacturing overhead per unit = Fixed manufacturing overhead ÷ Units produced
= $255, 000 ÷ 17, 000 units = $15.00 per unit
Manufacturing overhead deferred in (released from)inventory = Fixed manufacturing overhead in ending inventory - Fixed manufacturing overhead in beginning inventory = ($15.00 per unit × 4, 000 units)- $0 = $60, 000
Therefore, variable costing net operating income will be $60, 000 lower than absorption costing net operating income.

Harris Corporation Produces a Single Product