Aerotrino produces and sells popular t-shirts. Following is information about its t-shirts for 2014: $\begin{array}{ll}
\text { Selling price }& \$ 15.00 \text { per } t \text {-shirt } \
\text { Variable costs: }\
\text { Production (manufacturing costs) } & \$ 3.00 \text { per } t \text {-shirt } \
\text { Selling \& administration } & \$ 1.00 \text { per } t \text {-shirt }\
\text { Fixed costs: }\
\text { Production (manufacturing costs) } & \$ 1,000,000 \text { per year } \
\text { Selling \& administration } & \$ 2,000,000 \text { per year }
\end{array}$ During 2014, the company produced 400,000 t-shirts and sold 350,000 of them. Assume that there was no beginning inventory. How much is the net income under full costing?

Question

Quizplus · Accepted Answer

Under full costing, net income is calculated by considering both variable and fixed costs. The cost of goods sold (COGS) includes both variable production costs and a portion of fixed production costs. The net income is calculated as follows:1. Revenue = Selling price per t-shirt * Number of t-shirts sold = $15 * 350,000 = $5,250,000.2. Variable costs = (Variable production cost + Variable selling & administration cost) * Number of t-shirts sold = ($3 + $1) * 350,000 = $1,400,000.3. Fixed production cost per t-shirt = Total fixed production cost / Number of t-shirts produced = $1,000,000 / 400,000 = $2.50.4. Fixed production cost for sold t-shirts = Fixed production cost per t-shirt * Number of t-shirts sold = $2.50 * 350,000 = $875,000.5. Total fixed costs = Fixed production cost for sold t-shirts + Fixed selling & administration costs = $875,000 + $2,000,000 = $2,875,000.6. Total costs = Variable costs + Total fixed costs = $1,400,000 + $2,875,000 = $4,275,000.7. Net income = Revenue - Total costs = $5,250,000 - $4,275,000 = $975,000.

Aerotrino Produces and Sells Popular T-Shirts During 2014, the Company Produced 400,000 T-Shirts and Sold 350,000