Mega-Thirst Produces an Energy Drink Called Mega-Caffeine

Multiple Choice

Mega-Thirst produces an energy drink called Mega-Caffeine. The drinks sell to grocery stores and other retailers for $10 a case. During September, the first month of production, the company used $65,000 of aluminum cans and $35,000 of syrup, soda and caffeine. September manufacturing wages were $60,000 and variable manufacturing overhead incurred was $20,000. September's fixed manufacturing overhead costs were $70,000 and fixed selling and administrative costs were $12,000. Selling commissions were $0.25 per case. Mega-Thirst sold 46, 000 of the 50,000 cases that were produced in September for $10 per case.
- Which method would result in the larger operating income and why?

A) Variable costing- because the cost per unit is less, which means ending inventory costs are smaller
B) Variable costing- because the fixed manufacturing costs are all expensed during September
C) Absorption costing- because the cost per unit is higher, which means ending inventory costs are larger
D) Absorption costing- because the fixed manufacturing costs are all expensed during September