Aaron Corporation, which has only one product, has provided the following data concerning its most recent month of operations: What is the net operating income for the month under absorption costing?
A) $6,400
B) $12,000
C) $5,600
D) $(20,400)

Question

Aaron Corporation, which has only one product, has provided the following data concerning its most recent month of operations:  What is the net operating income for the month under absorption costing?
A) $6,400 
B) $12,000 
C) $5,600 
D) $(20,400)

Quizplus · Accepted Answer

Net operating income under absorption costing is calculated as Total Sales - Cost of Goods Sold - Total Operating Expenses. 
Total Sales = $93,000 
Cost of Goods Sold = $47,800 + ($2.50 per unit x 10,000 units) = $72,800 
Total Operating Expenses = $12,200 + $3,600 + $2,000 = $17,800 
Net Operating Income = $93,000 - $72,800 - $17,800 = $2,400 
However, there was a $9,600 increase in inventory under absorption costing, which is required to be subtracted to arrive at the net operating income for the month. 
Net Operating Income = $2,400 - $12,000 (increase in inventory x variable cost per unit) = -$9,600 
Therefore, the net operating income for the month under absorption costing is ($9,600) or $(9,600). Option D is the correct answer.

Aaron Corporation, Which Has Only One Product, Has Provided the Following