The Browning Company manufactures a single product; the standard costs per unit being variable manufacturing $8, fixed manufacturing $6. Selling and administrative costs are $2 per unit sold. The selling price is $20 per unit. Actual and budgeted fixed overhead is $900,000 for the year. Information about Browning's production activity for the year is:
What is the profit under variable costing?
A) $1 250 000
B) $350 000
C) $500 000
D) Insufficient information to determine

Question

The Browning Company manufactures a single product; the standard costs per unit being variable manufacturing $8, fixed manufacturing $6. Selling and administrative costs are $2 per unit sold. The selling price is $20 per unit. Actual and budgeted fixed overhead is $900,000 for the year. Information about Browning's production activity for the year is: 
What is the profit under variable costing?
A) $1 250 000 
B) $350 000 
C) $500 000 
D) Insufficient information to determine

Quizplus · Accepted Answer

Under variable costing, fixed manufacturing overhead is treated as a period cost and is not included in the cost of goods sold. Therefore, the total cost per unit is $8 (variable manufacturing) + $2 (selling and administrative) = $10. The contribution margin per unit is $20 - $10 = $10. 
Using the information provided in the chart, total units produced and sold for the year is 500,000. 
Total variable cost = $8 x 500,000 = $4,000,000 
Total fixed manufacturing overhead = $900,000 
Total fixed cost per unit = ($6 / 20) x 500,000 = $150,000 
Total cost of goods sold = $4,000,000 + $150,000 = $4,150,000 
Total contribution margin = $10 x 500,000 = $5,000,000 
Total net income under variable costing = Total contribution margin - Total fixed cost = $5,000,000 - $900,000 = $4,100,000 
Profit = Sales - Total variable cost - Total fixed cost = $20 x 500,000 - $4,000,000 - $900,000 = $350,000.

The Browning Company Manufactures a Single Product; the Standard Costs