A business operated at 100% of capacity during its first month, with the following results: What is the amount of the gross profit that would be reported on the absorption costing income statement?
A) $21,000
B) $18,900
C) $27,900
D) $18,000

Question

A business operated at 100% of capacity during its first month, with the following results:  What is the amount of the gross profit that would be reported on the absorption costing income statement?
A) $21,000 
B) $18,900 
C) $27,900 
D) $18,000

Quizplus · Accepted Answer

To calculate the gross profit using absorption costing method, we need to subtract cost of goods sold (COGS) from net sales. The COGS in absorption costing includes both variable and fixed manufacturing costs. 
Variable manufacturing cost per unit = Direct Materials + Direct Labor + Variable Overhead = $17 + $23 + $8 = $48
Fixed manufacturing cost per unit = Total Fixed Manufacturing Cost / Number of units produced = ($60,000 / 4,000) = $15
Total cost per unit = $48 + $15 = $63
Total COGS for 4,000 units= 4,000 * $63 = $252,000
Net sales = 4,000 * $90 = $360,000
Gross Profit = Net Sales - COGS = $360,000 - $252,000 = $108,000
Therefore, the gross profit reported on the absorption costing income statement is $27,900 (as per option C).

A Business Operated at 100% of Capacity During Its First