Dallavalle Corporation manufactures and sells one product. The following information pertains to the company's first year of operations: The company does not have any variable manufacturing overhead costs or variable selling and administrative expenses. During its first year of operations, the company produced 32,000 units and sold 31,000 units. The company's only product is sold for $238 per unit.The company is considering using either super-variable costing or an absorption costing system that assigns $10 of direct labor cost and $67 of fixed manufacturing overhead to each unit that is produced. Which of the following statements is true regarding the net operating income in the first year?

A) Super-variable costing net operating income exceeds absorption costing net operating income by $1,000.
B) Super-variable costing net operating income exceeds absorption costing net operating income by $77,000.
C) Absorption costing net operating income exceeds super-variable costing net operating income by $77,000.
D) Absorption costing net operating income exceeds super-variable costing net operating income by $1,000.

Question

Dallavalle Corporation manufactures and sells one product. The following information pertains to the company's first year of operations:

The company does not have any variable manufacturing overhead costs or variable selling and administrative expenses. During its first year of operations, the company produced 32,000 units and sold 31,000 units. The company's only product is sold for $238 per unit.The company is considering using either super-variable costing or an absorption costing system that assigns $10 of direct labor cost and $67 of fixed manufacturing overhead to each unit that is produced. Which of the following statements is true regarding the net operating income in the first year?

A) Super-variable costing net operating income exceeds absorption costing net operating income by $1,000.
B) Super-variable costing net operating income exceeds absorption costing net operating income by $77,000.
C) Absorption costing net operating income exceeds super-variable costing net operating income by $77,000.
D) Absorption costing net operating income exceeds super-variable costing net operating income by $1,000.

Claire Steciuk · Accepted Answer

Final Answer : C, Explanation :  Under super-variable costing, only the variable costs are assigned to the units produced and sold, which in this case is only the direct materials cost of $115 per unit. Therefore, the total variable cost per unit is $115 and the contribution margin per unit is $123. The total contribution margin for the year is $3,813,000 ($123 x 31,000 units sold). The fixed costs of $2,058,000 ($648,000 in fixed manufacturing overhead and $1,410,000 in fixed selling and administrative expenses) are expensed in the period they are incurred and are not assigned to the units produced and sold.Under absorption costing, both variable and fixed costs are assigned to the units produced, which includes $10 of direct labor cost and $67 of fixed manufacturing overhead. Therefore, the total cost per unit is $192 ($115 for direct materials + $10 for direct labor + $67 of fixed manufacturing overhead). The gross profit margin per unit is $46 ($238 selling price - $192 total cost). The total cost of goods sold for the year is $5,952,000 ($192 per unit x 31,000 units sold). The gross margin for the year is $1,438,000 ($46 gross profit margin per unit x 31,000 units sold).The net operating income under super-variable costing is $1,755,000 ($3,813,000 contribution margin - $2,058,000 fixed costs). The net operating income under absorption costing is $1,678,000 ($1,438,000 gross margin - $648,000 fixed manufacturing overhead - $112,000 fixed selling and administrative expenses).Therefore, option C is correct as the absorption costing net operating income exceeds super-variable costing net operating income by $77,000.

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