Pep Enterprises manufactures coffee makers. Here are data regarding its first ye

Question

Pep Enterprises manufactures coffee makers. Here are data regarding its first year of operations. $200 %90 $61,200 $12 $13,600 None 1,400 units 2,000 units price, per unit manufacturing costs, per unit Fixed manufacturing overhead costs, total Variable selling and administrative expenses, per unit Fixed selling and administrative expenses, total Inventory, beginning of year Inventory, end of year Units sold during the year How much more (or less) operating income will Pep Enterprises report if it uses absorption costing rather than variable costing? No difference in operating income $30,000 less in operating income $30,800 more in operating income $25,200 less in operating income $25,200 more in operating income

Explanation / Answer

$ 25,200 more in operating income

Working:

Step-1:Calculation of operating income under absorbtion Costing Sales $       4,00,000 Cost of goods sold $       2,16,000 Gross Profit $       1,84,000 Selling and Administrartive expese $           37,600 Operating Income $       1,46,400 Working: a. Fixed Manufacturing cost per unit = Total fixed manufacturing cost/Total units manufactured = $       61,200 / 3400 = $         18.00 b. Cost of Goods sold per unit: Variable manufacturing cost per unit $    90.00 Fxed manufacturing cost per unit $    18.00 Unit cost of goods manufactured $ 108.00 c. Cost of goods sold = Units sold x Unit cost of goods sold = 2000 x $       108.00 = $       2,16,000 d. Total sales = Units sold x Unit selling price = 2000 x $       200.00 = $       4,00,000 e. Variabel selling cost = Units sold x Unit selling cost 2000 x $    12.00 = $       24,000 Fixed Selling cost $       13,600 Total Selling cost $       37,600 Step-2:Calculation of operating income under contribution margin method Per Unit Total Sales $        200 $       4,00,000 Variable cost: Variable cost of goods sold $          90 $       1,80,000 Variable selling cost $          12 $           24,000 Contribution Margin $       1,96,000 Fixed Cost: Fixed Manufacturing cost $           61,200 Fixed Selling cost $           13,600 Operating Income $       1,21,200 Step-3:Comparison of operating income Absorbtion Costing Contribution Margin Difference Operating Income $       1,46,400 $   1,21,200 $ 25,200 Thus, Operating income under Absorbtion costing is more than Contribution Margin by$ 25,200

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