McArthur Corp., which began business at the start of the current year, had the following data:
Planned and actual production: 40,000 units
Sales: 38,000 units at $15 per unit
Production costs:
Variable: $5 per unit
Fixed: $260,000
Selling and administrative costs:
Variable: $1 per unit
Fixed: $32,000
The gross margin that the company would disclose on an absorption-costing income statement is:
A) $0.
B) $133,000.
C) $166,500.
D) $342,000.
E) None of the other answers are correct.

Question

Quizplus · Accepted Answer

The gross margin under absorption costing is calculated as sales revenue minus cost of goods sold. The cost of goods sold includes both variable and fixed manufacturing costs. In this case, the variable manufacturing cost is $5 per unit and the fixed manufacturing cost is $260,000. The total cost of goods sold is therefore $5 per unit * 40,000 units + $260,000 = $460,000. The sales revenue is $15 per unit * 38,000 units = $570,000. Therefore, the gross margin is $570,000 - $460,000 = $110,000.