Hayek Bikes prepares the income statement under variable costing for its managerial reports, and it prepares the income statement under absorption costing for external reporting. For its first month of operations, 400 bikes were produced and 240 were sold; this left 160 bikes in ending inventory. The income statement information under variable costing follows.

Sales (240 * $1,650) $ 396,000

Variable product cost (240 * $650) 156,000

Variable selling and administrative expenses (240 * $55) 13,200

Contribution margin 226,800

Fixed overhead cost 72,000

Fixed selling and administrative expense 85,000

Net income $ 69,800

Instructions are listed below.

Explanation:

Giving the following information:

For its first month of operations, 400 bikes were produced and 240 were sold; this left 160 bikes in ending inventory. The income statement information under variable costing follows.

Sales (240 * $1,650) $ 396,000

Variable product cost (240 * $650) 156,000

Variable selling and administrative expenses (240 * $55) 13,200

Contribution margin 226,800

Fixed overhead cost 72,000

Fixed selling and administrative expense 85,000

Net income $ 69,800

Under absorption costing the fixed costs are allocated to the production costs for the period.

Unitary cost = variable cost per unit + unitary fixed costs

Unitary cost = 650 + (72,000/400) = $830

Income statement:

Sales (240 * $1,650) $ 396,000

COGS = (240*830) = (199,200)

Gross profit = $196,800

Variable selling and administrative expenses = (13,200)

Fixed selling and administrative expense = (85,000)

Net operating income = $98,600