2. CD New is a direct marketer of popular music. The following information about
ID: 2345841 • Letter: 2
Question
2. CD New is a direct marketer of popular music. The following information about its revenue and cost structure is available:Selling price $13.00 per CD
Variable Costs:
Direct Materials $ 1.00
Direct Labor 1.25
Variable Overhead .75
Selling and Admin 1.00
Fixed Costs:
Overhead $1,000,000 per year
Selling and Admin $3,000,000 per year
Assume that 500,000 CDs are produced and 450,000 are sold in 2010.
Required:
a) What is net income under Variable Costing?
b) What is net income under Absorption Costing?
c) What is ending inventory under Variable Costing?
d) What is ending inventory under Absorption Costing? (Points : 35)
Explanation / Answer
UNDER VARIABLE COSTING: 5,850,000 sales (13*450,000) -1,350,000 less variable product costs (3*450,000) -450,000 less variable selling and admin costs =4,050,000 contribution margin -1,000,000 less fixed overhead -3,000,000 less fixed selling and admin =$50,000 net income Ending inventory = 50,000 units * $3 per unit variable product cost = $150,000 UNDER ABSORPTION COSTING: 5,850,000 sales (13*450,000) -1,350,000 Less variable product costs (450,000*3) -900,000 ($1,000,000/500,000 units= $2 per unit; 450,000*2) =3,600,000 gross margin -450,000 variable selling and admin -3,000,000 fixed selling and admin =$150,000 net income Ending inventory = 50,000 units*($3 variable per unit + $2 fixed per unit)=$250,000 Required: a) What is net income under Variable Costing? $50,000 b) What is net income under Absorption Costing? $150,000 c) What is ending inventory under Variable Costing? $150,000 d) What is ending inventory under Absorption Costing? $250,000
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