Question

Question: Kenzi Kayaking, a manufacturer of kayaks, began operations this year. During this first year, the company produced 1,050 kayaks and sold 800 at a price of \(1,050 each. At this first year-end, the company reported the following income statement information using absorption costing.

Sales (800 × \)1,050)	\(840,000
Cost of goods sold (800 × \)500)	400,000
Gross margin	440,000
Selling and administrative expenses	230,000
Net income	210,000

Additional Information

a. Product cost per kayak totals \(500, which consists of \)400 in variable production cost and \(100 in fixed production cost—the latter amount is based on \)105,000 of fixed production costs allocated to the 1,050 kayaks produced.

b. The \(230,000 in selling and administrative expense consists of \)75,000 that is variable and $155,000 that is fixed.

1. Prepare an income statement for the current year under variable costing.

2. Explain the difference in income between the variable costing and absorption costing income statement.

Short answer

Net income under variable costing is$85,000.

Step-by-step solution

Meaning of Contribution Margin

Contribution margin refers to the amount left with a business organization after recovering all the variable costs from its sales revenue. The contribution margin is computed by deducting variable expenses from revenues.

Preparation of income statement

Kenzi Kayaking
Variable Costing Income Statement
Particulars	Details	Amounts ($)
Sales	(800*1050)	840,000
Less: Variable costs
Production cost	(400*1050)	420,000
Variable selling and administrative expenses		75,000
Contribution margin		345,000
Less: Fixed costs
Production cost	(100*1050)	105,000
Fixed selling and administrative expenses		155,000
Net income		$85,000

Difference in incomes

The variable costing income statement is reflecting less net income than absorption costing because variable costing approach considers theoperating variable expenseswhile computingcontribution margin.