Question

Ramort Company reports the following cost data for its single product. The company regularly sells 20,000 units of its product at a price of $60 per unit. If Ramort doubles its production to 40,000 units while sales remain at the current 20,000-unit level, by how much would the company's contribution margin increase or decrease under variable costing?

  

Direct materials	$	10	per unit
Direct labor	$	12	per unit
Overhead costs for the year
Variable overhead	$	3	per unit
Fixed overhead per year	$	40,000
Selling and adminstrative costs for the year
Variable	$	2	per unit
Fixed	$	65,200
Normal production level (in units)		20,000	units

  

Would the income be different if using variable costing instead of absorption costing?

RAMORT COMPANY Variable Costing Income Statement (Partial) Production volume (units) 20,000 Sales volume (units) 20,000 40,000 20,000 TTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTT Under variable costing, can a company increase its net income by increasing production?

Answer 1

variable costing treats treats fixed overhead as period cost

so they do not form part of product cost.

variable cost per unit remains same at any level of production hence contribution margin will not change with increase in production.As a result net income will also not change.

production	20000	40000
sales	20000	20000
Revenue	1200000[20000*60]	1200000[20000*60]
Less: variable expenses
direct material	200000[20000*10]	200000[20000*10]
direct labor	240000[20000*12]	240000[20000*12]
variable overhead	60000[20000*3]	60000[20000*3]
variable selling and administrative expense	40000[20000*2]	40000[20000*2]
Total variable expenses	540000[200000+240000+60000+40000]	540000[200000+240000+60000+40000]
contribution margin	660000[1,200,000-540000]	660000[12000000-540000]
under variable costing company increase net income by increasing production	NO