Wind Fall, a manufacturer of leaf blowers, began operations this year. During this year, the company produced 10,000 leaf blowers and sold 8,500. At year-end the company reported the following income statement using absorption costing.
$\begin{array}{lr}
\text { Sales }(8,500 \times \$ 45) & \$ 382,500 \
\text { Cost of goods sold }(8,500 \times \$ 20) & 170,000 \
\text { Gross margin } & \$ 212,500 \
\text { Selling and administrative expenses } & 60,000\
\text { Net Income }&\$152,500
\end{array}$
Production costs per leaf blower total $20, which consists of $16 in variable production costs and $4 in fixed production costs (based on the 10,000 units produced). Fifteen percent of total selling and administrative expenses are variable.
Compute net income under variable costing.

Question

Wind Fall, a manufacturer of leaf blowers, began operations this year. During this year, the company produced 10,000 leaf blowers and sold 8,500. At year-end the company reported the following income statement using absorption costing. 
$\begin{array}{lr}
\text { Sales }(8,500 \times \$ 45) & \$ 382,500 \
\text { Cost of goods sold }(8,500 \times \$ 20) & 170,000 \
\text { Gross margin } & \$ 212,500 \
\text { Selling and administrative expenses } & 60,000\
\text { Net Income }&\$152,500
\end{array}$
Production costs per leaf blower total $20, which consists of $16 in variable production costs and $4 in fixed production costs (based on the 10,000 units produced). Fifteen percent of total selling and administrative expenses are variable.
Compute net income under variable costing.

Quizplus · Accepted Answer

Under variable costing, only variable production costs are included in the cost of goods sold. The fixed production costs are treated as period costs. The variable cost per unit is $16, so the cost of goods sold for 8,500 units is $136,000. Variable selling and administrative expenses are 15% of $60,000, which is $9,000. Fixed selling and administrative expenses are $51,000. The net income is calculated as follows: Sales ($382,500) - Variable COGS ($136,000) - Variable S&A ($9,000) - Fixed S&A ($51,000) - Fixed production costs ($40,000) = $146,500.

Wind Fall, a Manufacturer of Leaf Blowers, Began Operations This