Peterson Corporation produces a single product. Data from the company's records for last year follow: Units in beginning inventory 0 Units produced 70,000 Units sold 60,000 Sales $1,400,000 Manufacturing costs: Variable $630,000 Fixed $315,000 Selling and administrative expenses: Variable $98,000 Fixed $140,000 Under variable costing, net operating income would be: $217,000 $307,000 $374,500 $352,000

$307,000

Explanation:

Step 1

First determine the units Sold, Produced and the units remaining in Inventory. This are important amounts for our calculation.

Units Sold = 60,000

Units Produced = 70,000

Beginning Inventory = 0

Ending Inventory (0 +  70,000 - 60,000) = 10,000

Step 2

Now we identify the method that is used for the preparation of Income Statement. In this case it is the variable costing method.

Variable Costing Method, only takes into account the Variable Manufacturing Costs for Product Costing. The Fixed Manufacturing Costs together with All Non-Manufacturing Expenses are regarded as Period Costs and are Expensed In the Income Statement.

Step 3

Calculation of Production Cost.

In this case this is $630,000 (variable costing)

Step 4

Calculation of Ending Inventory.

In this case this is $90,000 ($630,000 × 10,000 / 70,000)

Step 5

Calculation of Cost of Sales.

This will be $540,000 ($630,000 - $90,000). That is Production Costs and Opening Inventory less Closing Inventory.

Step 6

Calculation of Gross Profit.

Gross Profit is Sales less Cost of Sales. That is $1,400,000 - $540,000 which gives  $860,000.

Step 7

Calculation of Expenses.

For Variable Costing, this will be Fixed Manufacturing Costs plus All Non - Manufacturing Costs. That is $315,000 + $98,000 + $140,000 which gives $553,000.

Step 8 (Final Step)

Calculate the Net Operating Income.

Gross Profit less Expenses is the formula. That will be $307,000 ($860,000 - $553,000).

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