E7-2B. Variable and Absorption Costing Grant Company sells its product for $50 p

Question

E7-2B. Variable and Absorption Costing Grant Company sells its product for $50 per unit. Variable manu- facturing costs per unit are $30, and fixed manufacturing costs at the normal operating level of 18,000 units are $90,000. Variable selling expenses are $4 per unit sold. Fixed administrative expenses total $155,000. Grant had 7,000 units at a per-unit cost of $35 in beginning inventory in 2016. During 2016, the company produced 18,000 units and sold 20,000. Would net income for Grant Company in 2016 be higher if calculated using variable costing or using absorption costing? Calculate reported income using each method L02

Explanation / Answer

Calculate net income

Variable costing :

Abosorption costing

Net operating income will be higher under variable costing

Sales (20000*50) 1000000 Less:Variable expense Variable cost of goods sold (20000*30) (600000) Variable selling and administrative expense (20000*4) (80000) Total variable expense (680000) Contribution margin 320000 Less : FIxed expense Fixed manufacturing cost (90000) Fixed administrative expense (155000) Total fixed expense (245000) Net operating income 75000

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