Grainger Company produces only one product and sells that product for $110 per unit. Cost information for the product is as follows:

Direct Material $15 per Unit

Direct Labor $25 per Unit

Variable Overhead $5 per Unit

Fixed Overhead $33,500

Selling expenses are $3 per unit and are all variable. Administrative expenses of $15,000 are all fixed. Grainger produced 5,000 units; sold 4,000; and had no beginning inventory.

A. Compute net income under:

i. Absorption Costing $

ii. Variable Costing $

B. Which costing method provide higher net income? By how much?

The method provided more net income by $ .

The absorption costing method provides the higher net operating income.

Explanation:

Giving the following information:

Selling price= $110 per unit.

Cost information for the product is as follows:

Direct Material $15 per Unit

Direct Labor $25 per Unit

Variable Overhead $5 per Unit

Fixed Overhead $33,500

Selling expenses are $3 per unit and are all variable.

Administrative expenses of $15,000 are all fixed.

Grainger produced 5,000 units; sold 4,000; and had no beginning inventory.

The difference between absorption and variable costing methods is that the first one includes the fixed manufacturing overhead in the product cost.

First, we will calculate the unitary product cost under both methods.

Variable costing method;

Unitary cost= direct material + direct labor + variable overhead

Unitary cost= 15 + 25 + 5= $45

Absorption costing method:

Unitary cost= direct material + direct labor + total unitary overhead

Unitary cost= 15 + 25 + 5 + (33,500/5,000)= $51.7

Income statement Variable costing method:

Sales= 4,000*110= 440,000

Varaible cost= 4,000*45= (180,000)

Contribution margin= 260,000

Fixed overhead= (33,500)

Selling expenses= (3*4,000)= (12,000)

Administrative expenses= (15,000)

Net operating income= 199,500

Income statement under absorption costing method:

Sales= 440,000

Cost of goods sold= (51.7*4,000)= (206,800)

Gross profit= 233,200

Selling expenses= (3*4,000)= (12,000)

Administrative expenses= (15,000)

Net operating income= 206,200