Vidal Corporation Produces a Single Product

Question

Examlex · Accepted Answer

The Answer is a.

Income under absorption costing is:
Sales $15 ´ 3,800 =		$57,000
COGS 3,800 ´ ($4 + $20,000/5,000)		30,400
GM		$26,600
Oper. Exp.
Variable SG&A $2 ´ 3,800 =	$ 7,600
Fixed SG&A	14,000	(21,600)
Absorption income before income taxes		$ 5,000

b.

Income under variable costing:
CMU = SP - VProd.Cost - VSGA = $15 - $4 - $2 = $9
´ Vol. sold 3,800
CM	$34,200
Less: FC - Production	(20,000)
SG&A	(14,000)
Variable costing income before income taxes	$ 200

c.

Reason for difference in income:
Fixed costs expensed under absorp. costing
COGS 3,800 ´ $20,000/5,000 units	$15,200
Fixed SG&A	14,000
Total	$29,200
Fixed costs expensed under variable costing
Fixed SG&A	$14,000
Fixed Production	20,000
Total Fixed Cost	$34,000
Difference in Fixed Costs expensed under two methods	$ 4,800

This is also the difference in income amounts ($4 x 1,200)= $4,800.

Essay

Sales price	$15 per unit
Variable costs:
SG&A	$2 per unit
Production	$4 per unit
Fixed costs (total cost incurred for the year):
SG&A	$14,000
Production	$20,000