Swola Company reports the following annual cost data for its single product.
$\begin{array}{ll}
\text { Normal production level } & 75,000 \text { units } \
\text { Direct materials } & \$ 1.25 \text { per unit } \
\text { Direct labor } & \$ 2.50 \text { per unit } \
\text { Variable overhead } & \$ 3.75 \text { per unit } \
\text { Fixed overhead } & \$ 300,000 \text { in total }
\end{array}$

This product is normally sold for $25 per unit.If Swola increases its production to 200,000 units,while sales remain at the current 75,000 unit level,by how much would the company's gross margin increase or decrease under variable costing?
A) $187,500 increase.
B) $112,500 increase.
C) There will be no change in gross margin.
D) $112,500 decrease.
E) $187,500 decrease.

Question

Swola Company reports the following annual cost data for its single product.
$\begin{array}{ll}
\text { Normal production level } & 75,000 \text { units } \
\text { Direct materials } & \$ 1.25 \text { per unit } \
\text { Direct labor } & \$ 2.50 \text { per unit } \
\text { Variable overhead } & \$ 3.75 \text { per unit } \
\text { Fixed overhead } & \$ 300,000 \text { in total }
\end{array}$

This product is normally sold for $25 per unit.If Swola increases its production to 200,000 units,while sales remain at the current 75,000 unit level,by how much would the company's gross margin increase or decrease under variable costing?
A) $187,500 increase.
B) $112,500 increase.
C) There will be no change in gross margin.
D) $112,500 decrease.
E) $187,500 decrease.

Quizplus · Accepted Answer

Under variable costing, fixed overhead costs are not allocated to each unit produced but are expensed in full in the period incurred. Therefore, increasing production does not affect the gross margin as fixed costs remain unchanged and are not spread over more units.

Swola Company Reports the Following Annual Cost Data for Its