Smith Company produces and sells one product for $40 per unit. The company has no beginning inventories. Its variable manufacturing cost per unit is $18 and the variable selling and administrative expense per unit is $4. The fixed manufacturing overhead and fixed selling and administrative expense total $80,000 and $20,000, respectively. If Smith Company produces 8,000 units and sells 7,500 units during the year, then its net operating income under variable costing would be

$35,000

Explanation:

net operating income under variable costing would be calculated by preparing income statement under variable costing.

Smith Company

income statement under variable costing system

Sales (7,500 x $40)                                                          $300,000

Less Cost of Sales (7,500 x $18)                                     ($135,000)

Contribution                                                                       $165,000

Less Expenses

selling and administrative expense ($4 x 7,500)            ($30,000)

fixed overheads :

manufacturing                                                                   ($80,000)

selling and administrative expense                                 ($20,000)

Net Income                                                                         $35,000