Juan Valdez Coffee Company makes 100% premium Colombian Coffee. The coffee sells for $12 per pound. During its first year of operations, the company produced 500,000 pounds of coffee and sold 480,000 pounds. The company's cost information includes the following:
- Direct materials $ 3.00 per unit
- Direct labor $ 3.00 per unit
- Variable manufacturing overhead $ 1.00 per unit
- Variable selling and administrative expenses $ 3.00 per unit
- Fixed manufacturing overhead $200,000
- Fixed selling and administrative expenses $ 75,000
(a) Compute the unit product cost under absorption costing.
(b) Compute the unit manufacturing product cost under variable costing.
(c) What would net income be using absorption costing?
(d) What would net income be using variable costing?
(e) What explains the difference in the net operating income determined under the absorption and variable costing methods?