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 under absorption costing, we need to allocate the fixed manufacturing overhead cost per unit to the product's cost.

Total cost per unit = Direct materials + Direct labor + Variable overhead + (Fixed overhead/Number of units produced)

= $20 + $4 + $1 + ($10,000/2,000 units) = $25.

Revenue per unit = $35.

Therefore, the gross profit per unit = Revenue per unit - Total cost per unit = $35 - $25 = $10.

Total gross profit = Gross profit per unit x Total units sold = $10 x 2,790 units = $27,900.

Hence, the correct answer is C.

A Business Operated at 100% of Capacity During Its First