Taylor Ltd just finished its second year of operations. In the first year it produced 1,000 units and sold 400. The second year resulted in the same production level, but sales were 1,200 units. The variable costing income statements for both years are shown below: The operating profit for year 1 using absorption costing would be
A) $6,000
B) $(9,000)
C) $(9,800)
D) $600

Question

Quizplus · Accepted Answer

Using absorption costing, fixed manufacturing overhead expenses are assigned to the units produced. In year 1, Taylor Ltd produced 1,000 units but only sold 400, meaning that 600 units remain in ending inventory. These units absorbed a portion of the fixed manufacturing overhead expenses, resulting in a higher operating profit compared to variable costing.
The operating profit for year 1 using absorption costing can be calculated as follows:
Revenue (400 units sold × $20 per unit) = $8,000
Variable expenses (400 units sold × $10 per unit) = $4,000
Contribution margin = $4,000
Fixed manufacturing overhead expenses = $13,800
Net operating loss (absorption costing) = $9,800 (Option C)

Taylor Ltd Just Finished Its Second Year of Operations