Labadie 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 25,000 units and sold 22,000 units. The company's only product is sold for $251 per unit.The company is considering using either super-variable costing or a variable costing system that assigns $23 of direct labor cost 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 variable costing net operating income by $69,000.
B) Variable costing net operating income exceeds super-variable costing net operating income by $69,000.
C) Super-variable costing net operating income exceeds variable costing net operating income by $192,000.
D) Variable costing net operating income exceeds super-variable costing net operating income by $192,000.

Question

Labadie 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 25,000 units and sold 22,000 units. The company's only product is sold for $251 per unit.The company is considering using either super-variable costing or a variable costing system that assigns $23 of direct labor cost 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 variable costing net operating income by $69,000.
B) Variable costing net operating income exceeds super-variable costing net operating income by $69,000.
C) Super-variable costing net operating income exceeds variable costing net operating income by $192,000.
D) Variable costing net operating income exceeds super-variable costing net operating income by $192,000.

Naomi Valentina · Accepted Answer

Final Answer : B, Explanation :  Under super-variable costing, fixed manufacturing overhead is treated as a variable cost and is assigned to units produced based on the actual number of units produced. This means that the cost per unit will be higher when fewer units are produced, and lower when more units are produced.In this case, the fixed manufacturing overhead is $200,000, and the company produced 25,000 units. Therefore, the super-variable cost per unit would be:Super-variable cost per unit = (Fixed manufacturing overhead / Number of units produced) + Direct labor costSuper-variable cost per unit = ($200,000/25,000) + $23Super-variable cost per unit = $31Using this super-variable cost per unit, the cost of goods sold would be:Cost of goods sold = Number of units sold x Super-variable cost per unitCost of goods sold = 22,000 x $31Cost of goods sold = $682,000Since there are no variable manufacturing overhead costs or variable selling and administrative expenses, the total variable cost per unit under the variable costing system would be $23 (direct labor cost). Therefore, the variable cost of goods sold would be:Variable cost of goods sold = Number of units sold x Variable cost per unitVariable cost of goods sold = 22,000 x $23Variable cost of goods sold = $506,000The contribution margin (sales revenue minus variable costs) for the year would be:Contribution margin = Sales revenue - Variable cost of goods soldContribution margin = ($251 x 22,000) - $506,000Contribution margin = $5,502,000 - $506,000Contribution margin = $4,996,000Under super-variable costing, the contribution margin would be lower because the cost per unit is higher. Therefore, the net operating income would be lower under super-variable costing than under variable costing.Net operating income under variable costing = Contribution margin - Fixed manufacturing overheadNet operating income under variable costing = $4,996,000 - $200,000Net operating income under variable costing = $4,796,000Net operating income under super-variable costing = Sales revenue - Cost of goods sold - Variable selling and administrative expenses - Fixed manufacturing overheadNet operating income under super-variable costing = ($251 x 22,000) - ($682,000) - $0 - ($200,000)Net operating income under super-variable costing = $5,522,000 - $682,000 - $200,000Net operating income under super-variable costing = $4,640,000Therefore, the variable costing net operating income exceeds super-variable costing net operating income by $69,000.

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