Answer:
The absorption costing method provides the higher net operating income.
Explanation:
Giving the following information:
Selling price= $110 per unit.
Cost information for the product is as follows:
Direct Material $15 per Unit
Direct Labor $25 per Unit
Variable Overhead $5 per Unit
Fixed Overhead $33,500
Selling expenses are $3 per unit and are all variable.
Administrative expenses of $15,000 are all fixed.
Grainger produced 5,000 units; sold 4,000; and had no beginning inventory.
The difference between absorption and variable costing methods is that the first one includes the fixed manufacturing overhead in the product cost.
First, we will calculate the unitary product cost under both methods.
Variable costing method;
Unitary cost= direct material + direct labor + variable overhead
Unitary cost= 15 + 25 + 5= $45
Absorption costing method:
Unitary cost= direct material + direct labor + total unitary overhead
Unitary cost= 15 + 25 + 5 + (33,500/5,000)= $51.7
Income statement Variable costing method:
Sales= 4,000*110= 440,000
Varaible cost= 4,000*45= (180,000)
Contribution margin= 260,000
Fixed overhead= (33,500)
Selling expenses= (3*4,000)= (12,000)
Administrative expenses= (15,000)
Net operating income= 199,500
Income statement under absorption costing method:
Sales= 440,000
Cost of goods sold= (51.7*4,000)= (206,800)
Gross profit= 233,200
Selling expenses= (3*4,000)= (12,000)
Administrative expenses= (15,000)
Net operating income= 206,200
