Tokless Inc. planned and manufactured 400,000 units of its single product in 2019, its first year of operations. Variable manufacturing costs were $50 per unit of production. Planned and fixed manufacturing costs were $800,000. Marketing and administrative costs (all fixed) were $600,000 in 2019. Tokless Inc. sold 195,000 units of product in 2019 at $65 per unit.

Full costing operating income for 2019 is calculated to be:

Question

Full costing operating income for 2019 is calculated to be:

Quizplus · Accepted Answer

Full costing (also known as absorption costing) includes all manufacturing costs (both variable and fixed) in the cost of a product. To calculate the full costing operating income, we first determine the cost of goods sold (COGS) and then subtract it from the sales revenue, and finally subtract the fixed marketing and administrative costs.1. Calculate the total manufacturing costs:   - Variable manufacturing costs: 400,000 units * $50/unit = $20,000,000   - Fixed manufacturing costs: $800,000   - Total manufacturing costs = $20,800,0002. Calculate the cost per unit:   - Total manufacturing costs / Total units produced = $20,800,000 / 400,000 units = $52 per unit3. Calculate the COGS (only for the units sold):   - COGS = Cost per unit * Units sold = $52/unit * 195,000 units = $10,140,0004. Calculate the sales revenue:   - Sales revenue = Selling price per unit * Units sold = $65/unit * 195,000 units = $12,675,0005. Calculate the gross margin:   - Gross margin = Sales revenue - COGS = $12,675,000 - $10,140,000 = $2,535,0006. Subtract the fixed marketing and administrative costs to get the operating income:   - Operating income = Gross margin - Fixed marketing and administrative costs = $2,535,000 - $600,000 = $1,935,000Therefore, the full costing operating income for 2019 is $1,935,000.