The MisterKite Company experienced the following costs in 2007: Direct materials
ID: 2436116 • Letter: T
Question
The MisterKite Company experienced the following costs in 2007:Direct materials $2/unit
Direct labor $4/unit
Variable manufacturing overhead $1/unit
Variable selling $3/unit
Fixed manufacturing overhead $80,000
Fixed selling $40,000
Fixed administrative $20,000
During 2007 the company manufactured 70,000 units and sold 80,000 units. Assume the same unit costs in all years. Total variable costs on the company's 2007 contribution income statement will be:
Answer
$320,000.
$480,000.
$640,000.
$800,000.
Explanation / Answer
Companies are allowed to expense the costs on an income statement for a product when a product is sold. Since 80,000 units were sold, but only 70,000 were produced, this means that 10,000 units got sold that were produced in the previous year. The variable costs associated with creating those units would not have been expensed until now. The variable costs associated with each unit are $2+$4+$1+$3=$10. Since 80,000 units were sold, and variable costs per unit were $10, the total variable costs on the income statement would be $10*80,000 = $800,000.