Vision Tester, Inc., a manufacturer of optical glass, began operations on February 1 of the current year.During this time, the company produced 900,000 units and sold 800,000 units at a sales price of $12 per unit.Cost information for this year is shown in the following table: $\begin{array}{l}
\text { Production costs }\
\begin{array}{ll}
\text { Direct materials } & \$ 80 \text { per unit } \
\text { Direct labor } & \$ 70 \text { per unit } \
\text { Variable overhead } & \$ 500,000 \text { in total } \
\text { Fixed overhead } & \$ 450,000 \text { in total } \
\text { Jon-production costs } & \
\text { Variable selling and administrative } & \$ 30,000 \text { in total } \
\text { Fixed selling and administrative } & \$ 490,000 \text { in total }
\end{array}
\end{array}$ Given this information, which of the following is true?
A)Net income under variable costing will exceed net income under absorption costing by $50,000.
B)Net income under absorption costing will exceed net income under variable costing by $50,000.
C)Net income will be the same under both absorption and variable costing.
D)Net income under variable costing will exceed net income under absorption costing by $60,000.
E)Net income under absorption costing will exceed net income under variable costing by $60,000.

Question

Vision Tester, Inc., a manufacturer of optical glass, began operations on February 1 of the current year.During this time, the company produced 900,000 units and sold 800,000 units at a sales price of $12 per unit.Cost information for this year is shown in the following table: $\begin{array}{l}
\text { Production costs }\
\begin{array}{ll}
\text { Direct materials } & \$ 80 \text { per unit } \
\text { Direct labor } & \$ 70 \text { per unit } \
\text { Variable overhead } & \$ 500,000 \text { in total } \
\text { Fixed overhead } & \$ 450,000 \text { in total } \
\text { Jon-production costs } & \
\text { Variable selling and administrative } & \$ 30,000 \text { in total } \
\text { Fixed selling and administrative } & \$ 490,000 \text { in total }
\end{array}
\end{array}$ Given this information, which of the following is true?
A)Net income under variable costing will exceed net income under absorption costing by $50,000. 
B)Net income under absorption costing will exceed net income under variable costing by $50,000.
C)Net income will be the same under both absorption and variable costing.
D)Net income under variable costing will exceed net income under absorption costing by $60,000.
E)Net income under absorption costing will exceed net income under variable costing by $60,000.

Quizplus · Accepted Answer

Under absorption costing, all manufacturing costs (direct materials, direct labor, variable and fixed overhead) are included in the cost of the product. However, under variable costing, only variable manufacturing costs (direct materials, direct labor, and variable overhead) are included in the cost of the product.

Using absorption costing:

Revenue: 800,000 units x $12 per unit = $9,600,000
Cost of goods sold: 900,000 units x ($80 + $70 + $500,000/900,000) = $16,277,778
Gross profit: $9,600,000 - $16,277,778 = -$6,677,778

Using variable costing:

Revenue: $9,600,000
Variable cost of goods sold: 800,000 units x ($80 + $70 + $500,000/900,000) = $12,888,889
Contribution margin: $9,600,000 - $12,888,889 = -$3,288,889
Fixed manufacturing overhead: $450,000
Fixed selling and administrative expenses: $490,000
Net loss: -$3,288,889 - $450,000 - $490,000 = -$4,228,889

Therefore, net income under absorption costing will exceed net income under variable costing by $50,000.

Vision Tester, Inc Given This Information, Which of the Following Is True? A)Net

Vision Tester, Inc Given This Information, Which of the Following Is True?
A)Net