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:

Hi, I have attached the full question as image below

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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