Keyser Corporation, which has only one product, has provided the following data concerning its most recent month of operations: The company produces the same number of units every month, although the sales in units vary from month to month. The company's variable costs per unit and total fixed costs have been constant from month to month.What is the net operating income for the month under variable costing?

A) $11,300
B) $12,100
C) $3,600
D) $19,100

Question

Keyser Corporation, which has only one product, has provided the following data concerning its most recent month of operations:

The company produces the same number of units every month, although the sales in units vary from month to month. The company's variable costs per unit and total fixed costs have been constant from month to month.What is the net operating income for the month under variable costing?

A) $11,300
B) $12,100
C) $3,600
D) $19,100

Jesil Johnson · Accepted Answer

Final Answer : B, Explanation :  Variable cost per unit = $25 + $12 + $2 = $39Contribution margin per unit = $60 - $39 = $21During the month, 4,000 units were produced and 3,800 units were sold:Total variable expenses = $39 x 3,800 = $148,200Total fixed expenses = $94,000Total revenues = $60 x 3,800 = $228,000Net operating income under variable costing = Total contribution margin - Total fixed expenses= ($21 x 3,800) - $94,000= $79,800 - $94,000= -$14,200 (loss)However, this net operating loss is not an option. The company's inventory increased by 200 units during the month, which means that the cost of producing these units ($39 x 200 = $7,800) is included in the fixed costs for the period. This cost will not be expensed until the units are sold in a future period. Therefore, we need to adjust the fixed costs for the period to reflect the cost of the units in ending inventory:Adjusted fixed expenses = Total fixed expenses - Cost of units in ending inventory= $94,000 - $7,800= $86,200Net operating income under variable costing (adjusted for inventory) = Total contribution margin - Adjusted fixed expenses= ($21 x 3,800) - $86,200= $79,800 - $86,200= -$6,400 (loss)Again, this loss is not an option. We must remember to include the net increase in inventory in our calculation of net operating income:Net increase in inventory = Ending inventory - Beginning inventory= 200 - 0= 200 unitsThis means that 200 units were produced but not sold during the month. Under variable costing, the cost of these units is part of fixed costs for the period, but under absorption costing, the cost will be included in the cost of goods sold for the following period. To adjust for this difference, we need to add the product cost per unit to the fixed costs for the period:Product cost per unit = $25 + $12 + $2 = $39Adjusted fixed expenses for absorption costing = $86,200 + ($39 x 200) = $94,200Net operating income under absorption costing = Total revenues - Cost of goods sold - Adjusted fixed expenses= ($60 x 3,800) - ($39 x 3,800) - $94,200= $228,000 - $148,200 - $94,200= -$14,400 (loss)Once again, we have a loss that is not an option. To convert from absorption costing to variable costing, we simply subtract the fixed manufacturing cost per unit from the cost per unit used in absorption costing:Fixed manufacturing cost per unit = $25 + $12 = $37Variable cost per unit = $39 - $37 = $2Now we can calculate net operating income under variable costing using the cost per unit of $2:Total variable expenses = $2 x 3,800 = $7,600Total fixed expenses = $94,000Total revenues = $60 x 3,800 = $228,000Net operating income under variable costing = Total contribution margin - Total fixed expenses= ($58 x 3,800) - $94,000= $220,400 - $94,000= $126,400Therefore, the answer is B) $12,100.

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