Aces, Inc., a manufacturer of tennis rackets, began operations this year. The company produced 6,000 rackets and sold 4, 900. At year-end, the company reported the following income statement using absorption costing. Production costs per tennis racket total $38, which consists of $25 in variable production costs and $13 in fixed production costs (based on the 6,000 units produced). Ten percent of total selling and administrative expenses are variable. Compute net income under variable costing.
a) $165, 500
b) $233,000
c) $311,000
d) $194, 100
e) $240, 500

a) $165, 500

Explanation:

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We can calculate the net income under variable costing by reconciliating the net income under absorption costing to net income under variable costing. Alternatively we can prepare a whole new variable costing income statement.

Here I will show you the by reconciliating the net income under absorption costing to net income under variable costing.

Frist, calculate the units in opening and closing stock :

units in opening inventory = 0

units in closing inventory   = 6,000 - 4,900 = 1,100 rackets

Next, determine the unit fixed manufacturing cost :

unit fixed manufacturing cost = $13

Then, reconcile the incomes as shown :

Reconciliating the net income under absorption costing to net income under variable costing

net income under absorption costing               $179,800

add fixed cost in opening stock                                   $0

less fixed cost in closing stock  (1,100 x $13)     ($14,300)

net income under variable costing                    $165,500

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