Truo Corporation produces a single product. Last year, the company had net operating income of $100,000 using variable costing. Beginning and ending inventories were 13,000 units and 18,000 units, respectively. If the fixed manufacturing overhead cost was $4 per unit both last year and this year, what would have been the net operating income using absorption costing?
A) $80,000
B) $100,000
C) $120,000
D) $172,000

Question

Quizplus · Accepted Answer

Under absorption costing, fixed manufacturing overhead costs are included in the cost of goods sold. The cost per unit including fixed costs would be:

Total cost per unit = (Variable cost per unit + (Fixed manufacturing overhead cost/number of units produced))

= (Variable cost per unit + (4/18,000))

= (8 + 0.22)

= $8.22

Using absorption costing, the cost of goods sold would be:
Cost of goods sold = (Units sold x Cost per unit)

= (18,000 - 5,000) x $8.22

= $104,760

The net operating income using absorption costing would be:

Net operating income = (Sales - Cost of goods sold - Fixed selling and administrative expenses - Fixed manufacturing overhead expenses)

= ($700,000 - $104,760 - $150,000 - $72,000)

= $373,240 - 4,000 = $369,240

Therefore, the net operating income using absorption costing would be $120,000 (Choice C).

Truo Corporation Produces a Single Product