Allston Products sells a special kind of effects pedal for musical performers. Each unit sells for $20.00. Additional data for the month of April, 2014, are as follows: $$\begin{array} { | l | r | }
\hline \text { Direct materials } & \$ 4.00 \text { per unit } \
\hline \text { Direct labor } & \$ 8.00 \text { per unit } \
\hline \text { Variable manufacturing overhead } & \$ 20,000 \text { per month } \
\hline \text { Fixed manufacturing overhead } & \$ 14,000 \text { per month } \
\hline \text { Operating expenses } & \$ 21,000 \text { per month } \
\hline & \
\hline \text { Beginning inventory } & 0 \text { units } \
\hline \text { Units produced } & 8,000 \text { units } \
\hline \text { Units sold } & 7,500 \text { units } \
\hline \text { Ending inventory } & 500 \text { units } \
\hline
\end{array}$$
-Refer to the table above,Using absorption costing, how much is the net operating income for April?

Question

Allston Products sells a special kind of effects pedal for musical performers. Each unit sells for $20.00. Additional data for the month of April, 2014, are as follows: $$\begin{array} { | l | r | } 
\hline \text { Direct materials } & \$ 4.00 \text { per unit } \
\hline \text { Direct labor } & \$ 8.00 \text { per  unit } \
\hline \text { Variable manufacturing overhead } & \$ 20,000 \text {  per month } \
\hline \text { Fixed manufacturing overhead } & \$ 14,000 \text {  per month } \
\hline \text { Operating expenses } & \$ 21,000 \text {  per month } \
\hline & \
\hline \text { Beginning inventory } & 0 \text { units } \
\hline \text { Units produced } & 8,000 \text { units } \
\hline \text { Units sold } & 7,500 \text { units } \
\hline \text { Ending inventory } & 500 \text { units } \
\hline
\end{array}$$
-Refer to the table above,Using absorption costing, how much is the net operating income for April?

Quizplus · Accepted Answer

Under absorption costing, all manufacturing costs (both variable and fixed) are included in the cost of the product. The cost per unit is $4 (direct materials) + $8 (direct labor) + $2.50 (variable manufacturing overhead per unit, calculated as $20,000/8,000 units) + $1.75 (fixed manufacturing overhead per unit, calculated as $14,000/8,000 units) = $16.25. The cost of goods sold for 7,500 units is 7,500 units * $16.25 = $121,875. Sales revenue is 7,500 units * $20 = $150,000. Gross profit is $150,000 - $121,875 = $28,125. Subtracting operating expenses of $21,000 gives a net operating income of $7,125.

Allston Products Sells a Special Kind of Effects Pedal for Musical