Bradman Corporation has reported operating profit of $30 000 and a fixed overhead cost rate is $20 per unit for the current accounting period.Under absorption costing,if this company now produces an additional 100 units of inventory,then operating profit:
A)will increase by $2000.
B)will not be affected.
C)will increase by $2000 only if the additional 100 units of inventory are sold.
D)is indeterminable.

Question

Quizplus · Accepted Answer

Under absorption costing, fixed overhead costs are allocated to the cost of each unit produced. Producing an additional 100 units would allocate an additional $20 per unit in fixed overhead costs to these units, increasing the total cost of goods sold when these units are sold. However, the question asks about the effect of production, not sales. When these 100 units are produced, their production costs, including the allocated fixed overhead, are capitalized as inventory. This does not immediately affect the operating profit. However, under absorption costing, the fixed overhead cost allocated to these additional units (100 units * $20/unit = $2000) increases the value of inventory, which, without considering the effect of sales, decreases the cost of goods sold and increases operating profit by $2000 for the period in which they are produced, assuming no sales are made. This is because the fixed costs are spread over more units, reducing the cost per unit sold during the period.

Bradman Corporation Has Reported Operating Profit of $30 000 and a Fixed