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Hello sir,
There was this question that I couldn’t figure out how to do…my answer came wrong and I’m not really sure why
XYZ Inc. sells a single product for $10 per unit. Variable production costs are $5 per unit. Fixed overhead costs amount $10,000 per month. Variable selling costs are $1 per unit. Fixed selling costs are $5,000 per month. Last month, the company produced 10,000 units and sold 6,000 units. What was ABC’s net operating income?
So I just tried to find the profit by taking sales revenue-all costs
=6000(10-5)-(5*10,000)-10000-6000-5000
=-41000However the answer found contribution and deducted it from fixed
The contirbution did not confuse me
What confused me was them taking variable selling cost per unit and multiplying with production units• contribution margin (CM) = $10 ? $5 ? $1 = $4 per unit.
• net operating income = CM ? fixed costs = (6,000 units × $4) ? $10,000 ? $5,000 = $9,000 profit.
Isn’t it wrong to multiply a variable selling cost per unit with the production units
It’s supposed to be multiplied with total selling units so that we can find net income rightThe contribution is 10 – 5 – 1 = $4 per unit.
Therefore the total contribution is 6,000 x $4 = $24,000.
To get the profit we then subtract the fixed costs of 10,000 + 5,000 = $15,000.
Therefore the profit is 24,000 – 15,000 = $9,000.
What you were doing ignores the fact that there is a closing inventory of 4,000 units (because they produced 10,000 and only sold 6.000).
This is a marginal costing question and I do suggest that you watch my free lectures on marginal and absorption costing where I work through a similar example.
The lectures are a complete free course for Paper MA and cover everything needed to be able to pass the exam well.
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