Leesburg Bags produces backpacks.The costs and prices for the backpacks follow (Assume the same unit costs in all years): $$\begin{array} { l r }
\text { Selling price } & \$ 23.00 \text { per backpack } \
\text { Variable costs: } & \
\text { Production } & \$ 11.00 \text { per backpack } \
\text { Selling } & \$ 2.00 \text { per backpack } \
\text { Fixed Costs: } & \
\text { Production } & \$ 900,000 \text { per year } \
\text { Selling and administrative } & \$ 540,000 \text { per year }
\end{array}$$ Leesburg Bags produced 250,000 backpacks for the year and sold 200,000.There was no beginning inventory, and costs throughout the year were stable.How much is net income under variable costing?

Question

Leesburg Bags produces backpacks.The costs and prices for the backpacks follow (Assume the same unit costs in all years): $$\begin{array} { l r } 
\text { Selling price } & \$ 23.00 \text { per backpack } \
\text { Variable costs: } & \
\text { Production } & \$ 11.00 \text { per backpack } \
\text { Selling } & \$ 2.00 \text { per backpack } \
\text { Fixed Costs: } & \
\text { Production } & \$ 900,000 \text { per year } \
\text { Selling and administrative } & \$ 540,000 \text { per year }
\end{array}$$ Leesburg Bags produced 250,000 backpacks for the year and sold 200,000.There was no beginning inventory, and costs throughout the year were stable.How much is net income under variable costing?

Quizplus · Accepted Answer

Under variable costing, only variable costs are considered in calculating net income. The contribution margin per backpack is $10 ($23 selling price - $11 production cost - $2 selling cost). Total contribution margin for 200,000 backpacks sold is $2,000,000. Subtracting fixed costs ($900,000 production + $540,000 selling and administrative = $1,440,000) gives a net income of $560,000.

Leesburg Bags Produces Backpacks Leesburg Bags Produced 250,000 Backpacks for the Year and Sold