Hermes Company sales are $800,000, cost of goods under absorption costing is $600,000, and total operating expenses are $120,000. If cost of good sold is 70% variable and total operating expenses are 60% fixed, what is the contribution margin under variable costing?

Question

Quizplus · Accepted Answer

Under variable costing, only variable costs are included in the cost of goods sold. 
Variable cost of goods sold = Sales - Variable Costs = $800,000 - 0.7 * $600,000 = $220,000
Contribution margin = Sales - Variable Costs = $800,000 - $220,000 = $580,000
Total fixed costs = Operating Expenses = $120,000
Contribution Margin - Fixed Costs = Net Operating Income
$580,000 - $120,000 = $460,000 (Net Operating Income under variable costing)
Therefore, the contribution margin under variable costing is $580,000.

Hermes Company Sales Are $800,000, Cost of Goods Under Absorption