Lincoln Company reported the following information about the production and sales of its only product during its first month of operations: $$\begin{array} { l l }
\text { Sales ( } \$ 225 \text { per unit) } & \$ 360,000 \
\text { Direct materials used } & \$ 176,000 \
\text { Direct labor } & \$ 100,000 \
\text { Variable factory overhead } & \$ 44,000 \
\text { Fixed factory overhead } & \$ 80,000 \
\text { Variable selling and administrative } & \$ 20,000 \
\text { expenses } & \
\text { Fixed s elling and administrative expenses } & \$ 10,000 \
\text { Endinginventories: Direct materials } & - 0 - \
\text { WIP } & - 0 -\\text { Finished goods }&400 \text { units }
\end{array}$$ The operating income (loss) under variable costing is:

Question

Lincoln Company reported the following information about the production and sales of its only product during its first month of operations: $$\begin{array} { l l } 
\text { Sales ( } \$ 225 \text { per unit) } & \$ 360,000 \
\text { Direct materials used } & \$ 176,000 \
\text { Direct labor } & \$ 100,000 \
\text { Variable factory overhead } & \$ 44,000 \
\text { Fixed factory overhead } & \$ 80,000 \
\text { Variable selling and administrative } & \$ 20,000 \
\text { expenses } & \
\text { Fixed s elling and administrative expenses } & \$ 10,000 \
\text { Endinginventories: Direct materials } & - 0 - \
\text { WIP } & - 0 -\\text { Finished goods }&400 \text { units }
\end{array}$$ The operating income (loss) under variable costing is:

Quizplus · Accepted Answer

Under variable costing, only variable costs are considered product costs. The operating income is calculated as: Sales - Variable Costs - Fixed Costs. Sales = $360,000. Variable Costs = Direct Materials + Direct Labor + Variable Factory Overhead + Variable Selling and Administrative = $176,000 + $100,000 + $44,000 + $20,000 = $340,000. Contribution Margin = Sales - Variable Costs = $360,000 - $340,000 = $20,000. Fixed Costs = Fixed Factory Overhead + Fixed Selling and Administrative = $80,000 + $10,000 = $90,000. Operating Income = Contribution Margin - Fixed Costs = $20,000 - $90,000 = $(70,000). However, the finished goods inventory adjustment for variable costing is not considered here, leading to a miscalculation. The correct operating income under variable costing should be $(6,000).

Lincoln Company Reported the Following Information About the Production and Sales