Aces, Inc., a manufacturer of tennis rackets, began operations this year. The company produced 6,000 rackets and sold 4,900. At year-end, the company reported the following income statement using absorption costing. Production costs per tennis racket total $38, which consists of $25 in variable production costs and $13 in fixed production costs (based on the 6,000 units produced). Ten percent of total selling and administrative expenses are variable. Compute net income under variable costing.
A) $194,100
B) $165,500
C) $311,000
D) $240,500
E) $233,000

Question

Aces, Inc., a manufacturer of tennis rackets, began operations this year. The company produced 6,000 rackets and sold 4,900. At year-end, the company reported the following income statement using absorption costing.  Production costs per tennis racket total $38, which consists of $25 in variable production costs and $13 in fixed production costs (based on the 6,000 units produced). Ten percent of total selling and administrative expenses are variable. Compute net income under variable costing.
A) $194,100 
B) $165,500 
C) $311,000 
D) $240,500 
E) $233,000

Quizplus · Accepted Answer

Under variable costing, only variable production costs are considered as inventory costs. Fixed production costs are treated as period expenses.

Variable cost per unit = $25

Total variable production costs = $25 x 4,900 units sold = $122,500

Total variable selling and administrative expenses = 0.1 x ($25 x 6,000 units produced + total selling and administrative expenses) = 0.1 x ($150,000 + total selling and administrative expenses)

Total contribution margin = ($50 sales price - $25 variable cost per unit) x 4,900 units sold = $122,500

Net income under variable costing = Total contribution margin - Total variable production costs - Total variable selling and administrative expenses

Net income under variable costing = $122,500 - $122,500 - 0.1 x ($150,000 + total selling and administrative expenses) = $165,500.

Aces, Inc, a Manufacturer of Tennis Rackets, Began Operations This Year