Shastrl Bicycle of Bombay, India, produces an Inexpensive, yet rugged, bicycle f

Question

Shastrl Bicycle of Bombay, India, produces an Inexpensive, yet rugged, bicycle for use on the city's crowded streets that it sells for 910 rupees. (Indian currency is denominated In rupees, denoted by R.) Selected data for the company's operations last year follow: Units In beginning Inventory Units produced Units sold Units In ending Inventory Varlable costs per unit: 0 10,000 5,000 5,000 Direct materials Direct labor Varlable manufacturing overhead Varlable selling and administrative R 90 R 306 R 22 R 13 Fixed costs: Flxed manufacturing overhead Flxed selling and administrative R 580,000 R 495,000 The absorption costing Income statement prepared by the company's accountant for last year appears below: R 4,550,000 2,380,000 Sales Cost of goods sold Gross margin Selling and administrative expense 2170,000 560,000 Net operating Income R 1,610,000

Explanation / Answer

1. Fixed manufacturing overhead cost per unit produced = R 580,000 / 10,000 = R 58 per unit

Since 5,000 units are unsold at the end of the period, the fixed manufacturing overhead cost included therein is 5,000 x 58 = R 290,000

2. Variable costing Income Statement:

R R Sales ( 5,000 units @ R 910) 4,550,000 Less variable cost ( 5,000 units @ R 431 per unit) 2,155,000 Contribution margin 2,395,000 Less Fixed costs: Manufacturing overhead cost 580,000 Selling and administrative cost 495,000 1,075,000 Net operating income 1,320,000

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