Octagonal Company has the following information for 2018: $\begin{array}{lr}
\text { Selling price } & \$ 150 \text { per unit } \
\text { Variable production costs } & \$ 40 \text { per unit produced } \
\text { Variable selling and admin. expenses } & \$ 16 \text { per unit sold } \
\text { Fixed production costs } & \$ 200,000 \
\text { Fixed selling and admin. expenses } & \$ 140,000 \
\text { Units produced } & 10,000 \text { units } \
\text { Units sold } & 8,000 \text { units }
\end{array}$ There were no beginning inventories.
What is the net income for Octagonal using the absorption costing method?
A)$600,000
B)$480,000
C)$1,200,000
D)$452,000

Question

Quizplus · Accepted Answer

Under the absorption costing method, both variable and fixed production costs are included in the cost of goods sold. The calculation is as follows:1. Cost of goods manufactured (COGM) = (Variable production cost per unit * Units produced) + Fixed production costs = ($40 * 10,000) + $200,000 = $400,000 + $200,000 = $600,000.2. Cost of goods sold (COGS) = COGM since there are no beginning inventories and assuming all produced units were available for sale. However, only the units sold are considered, so we adjust COGS for the units sold: COGS = (COGM / Units produced) * Units sold = ($600,000 / 10,000) * 8,000 = $60 per unit * 8,000 units = $480,000.3. Total revenue = Selling price per unit * Units sold = $150 * 8,000 = $1,200,000.4. Total variable selling and admin expenses = Variable selling and admin expense per unit * Units sold = $16 * 8,000 = $128,000.5. Total expenses = COGS + Fixed selling and admin expenses + Total variable selling and admin expenses = $480,000 + $140,000 + $128,000 = $748,000.6. Net income = Total revenue - Total expenses = $1,200,000 - $748,000 = $452,000.

Octagonal Company Has the Following Information for 2018 There Were No Beginning Inventories