Dilithium Batteries is a division of Enterprise Corporation. The division manufa

Question

Dilithium Batteries is a division of Enterprise Corporation. The division manufactures and sells a long-life battery used in a wide variety of applications. During the coming year, it expects to sell 60,000 units for $35 per unit. Nyota Uthura is the division manager. She is considering producing either 60,000 or 90,000 units during the period. Other information is presented in the schedule Beginning inventory Expected sales in units Selling price per unit Variable manufacturing costs per unit Fixed manufacturing overhead costs (total) Fixed manufacturing overhead costs per unit: 60,000 $35 $13 $540,000 Based on 60,000 units Based on 90,000 units Manufacturing cost per unit: Based on 60,000 units Based on 90,000 units $9 per unit ($540,000 ÷ 60,000) $6 per unit ($540,000 ÷ 90,000) $22 per unit ($13 variable$9 fixed) $19 per unit ($13 variable$6 fixed) $5 Variable selling and administrative expenses Fixed selling and administrative expenses (total) $50,000

Explanation / Answer

In the given question image, answer is already given for absorption costing. So I assume you need variable costing income statement. Providing below the solution with explanation for your understanding on how variable costing is different from absorption costing.

In Variable costing, Contribution is arrived by deducting variable cost from the revenue. Then the net profit or loss will be arrived by deducting the fixed cost from the contribution. This is also known as contribution analysis.

Revenue – Variable cost = Contribution.

                Contribution – Fixed cost = Profit/(Loss)

In variable costing, variable cost is considered as product cost and fixed cost is considered as period cost. Whereas in case of absorption costing both fixed and variable costs are considered as the product cost. That’s why in variable costing, we will deduct the variable cost of the products sold. But, fixed cost will be deducted in total as a period cost.

In the problem, it is given that expected sales are 60000 only irrespective of number of units produced.

Variable costing income statement:

60000 units produced

90000 units produced

Amounts in $

Amounts in $

Revenues

2100000

2100000

Less: Variable manufacturing cost @ %13 per unit

780000

(60000units*$13)

780000

(See Note 1 below)

Less: Variable selling and administrative expenses

300000

(60000units*$5)

300000

Contribution (2100000-780000-300000)

1020000

1020000

Less: Fixed manufacturing overhead cost

540000

540000

Less: Fixed selling and administrative expenses

50000

50000

Profit/Loss (1020000-540000-50000)

430000

430000

Note 1: Even though 90000 units produced, expected sales are 60000 only. So, variable manufacturing won’t change. For better understanding see below calculation.

Variable manufacturing cost = opening stock + Production – closing stock.

Note: 1

Opening stock

0

Add: Production 90000*13

1170000

(90000 units produced)

Less: Closing stock 30000*13

390000

(60000 units sold. So, closing stock is 90000-60000 =30000 units)

Variable manufacturing cost

780000

60000 units produced

90000 units produced

Amounts in $

Amounts in $

Revenues

2100000

2100000

Less: Variable manufacturing cost @ %13 per unit

780000

(60000units*$13)

780000

(See Note 1 below)

Less: Variable selling and administrative expenses

300000

(60000units*$5)

300000

Contribution (2100000-780000-300000)

1020000

1020000

Less: Fixed manufacturing overhead cost

540000

540000

Less: Fixed selling and administrative expenses

50000

50000

Profit/Loss (1020000-540000-50000)

430000

430000

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