Whitman Company has just completed its first year of operations. The company’s absorption costing income statement for the year follows: Whitman Company Income Statement Sales (35,000 units × $25 per unit) $ 875,000 Cost of goods sold (35,000 units × $16 per unit) 560,000 Gross margin 315,000 Selling and administrative expenses 280,000 Net operating income $ 35,000 The company’s selling and administrative expenses consist of $210,000 per year in fixed expenses and $2 per unit sold in variable expenses. The $16 unit product cost given above is computed as follows: Direct materials $ 5 Direct labor 6 Variable manufacturing overhead 1 Fixed manufacturing overhead ($160,000 ÷ 40,000 units) 4 Absorption costing unit product cost $ 16

Required: 1. Redo the company’s income statement in the contribution format using variable costing.
2. Reconcile any difference between the net operating income on your variable costing income statement and the net operating income on the absorption costing income statement above.

Net operating income $ 35,000 on  variable costing income statement

Net operating income $ 35,000 on absorption costing income statement

Explanation:

Whitman Company

Income Statement

Variable Costing

Sales (35,000 units × $25 per unit) $ 875,000

Variable Costs

Direct materials $ 5× 35,000 units $ 175,000

Direct labor $6× 35,000 units  $ 210,000

Variable manufacturing overhead $1× 35,000 units $ 35000

Variable selling and administrative expenses $ 2× 35,000 units $ 70,000

Total Variable Costs = $ 14 * 35000     $ 490,000

Contribution Margin                                $ 385,000  

Less

Fixed Overheads       $4 * 35,000= $ 140,000            

Fixed Selling and administrative expenses    $280,000- $70,000= $ 210,000

Net operating income $ 35,000

Whitman Company

Income Statement

Sales (35,000 units × $25 per unit) $ 875,000

Cost of goods sold (35,000 units × $16 per unit) 560,000

Gross margin 315,000

Selling and administrative expenses 280,000

Net operating income $ 35,000

The company’s selling and administrative expenses consist of $210,000 per year in fixed expenses and $2 per unit sold in variable expenses. The $16 unit product cost given above is computed as follows: Direct materials $ 5 Direct labor 6 Variable manufacturing overhead 1 Fixed manufacturing overhead ($160,000 ÷ 40,000 units) 4 Absorption costing unit product cost $ 16

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