Zhender Inc. manufactures hair brushes that sell at wholesale for $2.60 per unit

ID: 2399454 • Letter: Z

Question

Zhender Inc. manufactures hair brushes that sell at wholesale for $2.60 per unit. Budgeted production in both 2015 and 2016 was 3,000 units. There was no beginning inventory in 2015. The following data summarized the 2015 and 2016 operations: 2015 2016 Units sold 2,500 3,200 Units produced 3,000 3,000 Costs: Variable factory overhead per unit $0.65 $0.65 Fixed factory overhead $1,290 $1,290 Variable marketing per unit $0.80 $0.80 Fixed Selling and Administrative $650 $650 Variable costing operating income for 2016 is calculated to be: $850. $1,150. $1,295. $1,654. $1,740.

Explanation / Answer

Solution:

Variable Costing System

1) Product Cost refers to the costs used to fabricate/make/produce a product.

2) Under Variable Costing System, product cost includes only following variable manufacturing costs:

- Cost of direct material used

- Direct labor cost

- Variable manufacturing overheads.

3) Under this system, fixed costs are not considered in product cost and for valuation of closing stock of finished goods. Fixed costs are treated as period cost in this system.

4) The value of finished goods and work in process is also comprised only of Manufacturing Variable Costs.

5) Selling and administrative expenses are not included because these are not the expenses incurred in production department. These expenses relate to selling and admin department.

Calculation of Variable Costing Operating Income

Sales Revenue (Units Sold 3200 * $2.60)

$8,320

Less: Total Variable Costs

Variable Factory Overhead (3200 Units x $0.65)

$2,080

Variable marketing costs (3200 Units x $0.80)

$2,560

Total Variable Costs

$4,640

Contribution Margin (sales - Variable costs)

$3,680

Fixed Costs:

Fixed Factory Overhead

$1,290

Fixed Selling and Administrative Expenses

$650

Total Fixed Costs

$1,940

Operating Income

$1,740

Hence, the correct option is $1,740

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