Loring company had the following data for the month: variable costs per unit: direct materials $4direct labor 3.20variable overhead 1variable selling expense 0.40fixed overhead is $4,000 per month; it is applied to production based on normal activity of 2,000 units. during the month, 2,000 units were produced. loring started the month with 300 units in beginning inventory, with unit product cost equal to this months unit product cost. a total of 2100 units were sold during the moth at price of $14. selling & administrative expense for the month, all fixed totaled $3,600.1. what is operating income under variable costing? 2. what is the unit product cost under absorption costing? 3.what is operating income under absorption costing?

(1) $3,740

(2) $10.20

(3) $3,540

Explanation:

(1) Contribution Margin:

= Revenue - Variable expense

= (2,100 × $14) - (Direct material + Direct labor + variable overhead + variable selling expense)

= $29,400 - ($8,400 + $6,720 + $2,100 + $840)

= $29,400 - $18,060

= $11,340

Total fixed expense = Fixed overhead + Fixed Selling & Administrative expense

                                  = $4,000 + $3,600

                                  = $7,600

Operating income under variable costing:

= Contribution Margin - Total fixed expense

= $11,340 - $7,600

= $3,740

(2) Unit product cost under absorption costing:

= Direct material + Direct labor + Variable overhead + Fixed overhead

= $4 + $3.20 + $1 + (4,000 ÷ 2,000)

= $4 + $3.20 + $1 + $2

= $10.20

(3) Gross margin = Revenue - cost of goods sold

                       = $29,400 - (2,100 × $10.20)

                       = $29,400 - $21,420

                       = $7,980

Total selling and Administrative expense:

= Variable selling + Fixed selling

= $840 + $3,600

= $4,440

Operating income under absorption costing:

= Gross margin - Total selling and Administrative expense

= $7,980 - $4,440

= $3,540