Leheny 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 55,000 units and sold 50,000 units. The company's only product is sold for $238 per unit.The net operating income for the year under super-variable costing is:

A) $1,400,000
B) $1,110,000
C) $1,005,000
D) $580,000

Question

Leheny 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 55,000 units and sold 50,000 units. The company's only product is sold for $238 per unit.The net operating income for the year under super-variable costing is:

A) $1,400,000
B) $1,110,000
C) $1,005,000
D) $580,000

Kayla Trotta · Accepted Answer

Final Answer : C, Explanation :  Under super-variable costing, only variable manufacturing costs are included in the cost of goods sold, and fixed manufacturing costs are treated as a period expense. This means that the cost of goods sold per unit is calculated as follows:Variable manufacturing cost per unit = direct materials + direct labor + variable manufacturing overhead= $50 + $80 + $28= $158Therefore, the cost of goods sold for the year is:Cost of goods sold = variable manufacturing cost per unit x number of units sold= $158 x 50,000= $7,900,000The total fixed manufacturing costs for the year are:Fixed manufacturing costs = fixed manufacturing overhead + fixed manufacturing labor= $1,200,000 + $800,000= $2,000,000This amount is treated as a period expense and is not included in the cost of goods sold.The contribution margin per unit is:Contribution margin per unit = selling price per unit - variable cost per unit= $238 - $158= $80The total contribution margin for the year is:Contribution margin = contribution margin per unit x number of units sold= $80 x 50,000= $4,000,000The fixed selling and administrative expenses for the year are:Fixed selling and administrative expenses = fixed selling expenses + fixed administrative expenses= $1,500,000 + $500,000= $2,000,000This amount is also treated as a period expense and is not included in the cost of goods sold.Therefore, the net operating income for the year under super-variable costing is:Net operating income = contribution margin - fixed selling and administrative expenses= $4,000,000 - $2,000,000= $2,000,000Since the company produced 55,000 units and sold 50,000 units, it must have 5,000 units in ending inventory. The cost of these units under super-variable costing would be:Cost of ending inventory = variable manufacturing cost per unit x number of units in ending inventory= $158 x 5,000= $790,000This amount would be reported as a current asset on the balance sheet.Therefore, the correct answer is C) $1,005,000.

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