Red River Company sells its product for $12,000 per unit. Variable costs per unit are: Manufacturing overhead -$8,000
Selling and administrative -$150
Fixed costs are:
Manufacturing overhead -$30,000
Selling and administrative -$40,000
Red River had no beginning inventory at January 1, 2010. Production was 20 units each year in 2010, 2011, and 2012. Sales were 20 units in 2010, 16 units in 2011, and 24 units in 2012.
Income/(Loss) under absorption costing for 2012 is:
A)$7,000.
B)($2,400).
C)$16,400.
D)$56,400.
E)$60,000.

Question

Quizplus · Accepted Answer

Under absorption costing, fixed manufacturing overhead (MOH) is included in the cost of each unit.

Total fixed MOH = $30,000

Variable costs per unit = Manufacturing overhead $8,000 + Selling and administrative $150 = $8,150

Total cost per unit = $8,150 + ($30,000/60 units produced annually) = $8,650

Total sales revenue = $12,000 × 24 units = $288,000

Total cost of goods sold = $8,650 × 24 units = $207,600

Gross profit = $288,000 - $207,600 = $80,400

Fixed selling and administrative expenses = $40,000

Operating income = Gross profit - Fixed selling and administrative expenses = $80,400 - $40,000 = $40,400

Therefore, Income under absorption costing for 2012 is $40,400 - $24,000 (fixed selling and administrative expenses / units sold) = $16,400.

Red River Company Sells Its Product for $12,000 Per Unit