Seattle Enterprises produces packaged fresh meals that sell for $10 each. During the current month, Seattle produced 2,800 meals, but only sold 2,700 meals. The variable cost per meal was $6 and the sales commissions per meal were $1. Total fixed manufacturing costs were $1,400 and total fixed marketing and administrative costs were $1,200.
-Net income under absorption costing would be:

Question

Seattle Enterprises produces packaged fresh meals that sell for $10 each. During the current month, Seattle produced 2,800 meals, but only sold 2,700 meals. The variable cost per meal was $6 and the sales commissions per meal were $1. Total fixed manufacturing costs were $1,400 and total fixed marketing and administrative costs were $1,200. 
-Net income under absorption costing would be:

Quizplus · Accepted Answer

Under absorption costing, all manufacturing costs (variable and fixed) are included in the cost of goods sold. The cost per meal is $6 (variable) + ($1,400/2,800) (fixed) = $6.50. The cost of goods sold for 2,700 meals is 2,700 x $6.50 = $17,550. Sales revenue is 2,700 x $10 = $27,000. Gross profit is $27,000 - $17,550 = $9,450. Subtracting sales commissions (2,700 x $1 = $2,700) and fixed marketing and administrative costs ($1,200), the net income is $9,450 - $2,700 - $1,200 = $5,550.

Seattle Enterprises Produces Packaged Fresh Meals That Sell for $10