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Operating Income Under Absorption Versus Variable Costing

Precision Numbers, Inc., manufactures pocket calculators. Costs incurred in making 25,000 calculators in April included $85,000 of fixed manufacturing overhead. The total absorption cost per calculator was $12.50.

Required:
(a) Calculate the variable cost per calculator. (Do not round your intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.)

Variable cost per calculator $

(b) The ending inventory of pocket calculators was 1,850 units higher at the end of the month than at the beginning of the month. By how much and in what direction (higher or lower) would operating income for the month of April be different under variable costing than under absorption costing? (Do not round your intermediate calculations. Omit the "$" sign in your response.)

Operating income under variable costing will be $, than under absorption costing.

(c) Express the pocket calculator cost in a cost formula. (Do not round your intermediate calculations. Round your answers to 2 decimal places. Omit the "$" sign in your response.)
Total cost = $ + ($ / calculator x number of calculators)

Solution Summary

This solution illustrates how to compute a company's operating income using traditional (absorption) and variable (or direct) costing methods.

$2.19