[misslynz]

I can't figure out how to come up with the right answer. Could you please help?

The Collins Corporation just started business in January of 2004. They had no beginning inventories. During 2004 they manufactured 12,000 units of product, and sold 10,000 units. The selling price of each unit was $20. Variable manufacturing costs were $4 per unit, and variable selling and administrative costs were $2 per unit. Fixed manufacturing costs were $24,000 and fixed selling and administrative costs were $6,000. What would be the Collins Corporations Net income for 2004 using absorption costing?



a. $114,000

b. $110,000

c. $4,000

d. $106,000

e. $140,000



The correct answer is (A). Under variable costing, all fixed manufacturing overhead costs are expensed in the period incurred. Under absorption costing, only $20,000 of fixed overhead is expensed.

[CaptainForest]

Sales 10,000 x 20 = $200,000

COGS:
Var. Manfg Cost $4 x 10,000 = $40,000
Fixed Costs = $24,000 x (10,000/12,000) = $20,000

Gross Profit = $140,000

Expenses:
Var. Sell and Admin $2 x 10,000 = $20,000
Fixed Sell and Admin = $6,000

Net Income = $114,000

[misslynz]

Thanks for you help. I understand now! :)