Hurlex Company produces a single product Last year, Hurlex manufactured 15,000 units

and sold 12,000 units. Production costs for the year were as follows Direct materials
$150,000 Direct labor $180,000 Variable manufacturing overhead $135,000 Fixed
manufacturing overhead $210,000 Sales totaled $840,000 for the year, variable selling
expenses totaled $60,000, and fixed selling and administrative expenses totaled $180,000.
There were no units in the beginning inventory. Assume that direct labor is a variable
cost.

5. The contribution margin per unit would be: A) $25 B) $39 C) $34 D) $35

Solution:

Unit selling price ($840,000 ÷ 12,000).................. $70

Less direct materials ($150,000 ÷ 15,000)............. $10
Less direct labor ($180,000 ÷ 15,000)................... 12
Less variable manufacturing overhead ($135,000
÷ 15,000)............................................................ 9
Less variable selling and administrative ($60,000
÷ 12,000)............................................................ 5 36
Contribution margin............................................... $34

6. Under absorption costing, the carrying value on the balance sheet of the ending
inventory for the year would be: A) $135,000 B) $93,000 C) $105,000 D) $0

Solution:

Unit fixed manufacturing overhead = $210,000 ÷ 15,000 = $14

Unit product cost = Direct materials + Direct labor + Variable manufacturing
overhead + Fixed manufacturing overhead
= $10 + $12 + $9 + $14 = $45
Carrying value = Unit product cost × Ending inventory in units
= $45 × (15,000 − 12,000) = $45 × 3,000 = $135,000

7. Under variable costing, the company's net operating income for the year would be: A)
$42,000 higher than under absorption costing B) $30,000 higher than under absorption
costing C) $30,000 lower than under absorption costing
D) $42,000 lower than under absorption costing

Solution:

Unit fixed manufacturing overhead × Change in inventory in units

= $14 × (15,000 − 12,000) = $14 × 3,000 = $42,000
Since the units produced are greater than the units sold (inventory increased), net
income under absorption costing will be higher than net income under variable
costing.