Venlite Inc.produces and sells cosmetic products.Currently,the company is operating at 70% of its capacity.The selling price of its product is $30 per unit and it incurs a full cost of $25 to produce each unit.Its yearly fixed manufacturing overhead amounts to $20,000.The company has received a one-time order for supplying 5,000 units at $26 per unit.This order can be executed within the excess production capacity and will not involve any additional costs.To make this decision,the management of Venlite should use ________.

Question

Quizplus · Accepted Answer

The management of Venlite should use variable costing as the decision is short-term in nature. Variable costing considers only the variable production costs in the calculation of the cost of goods sold, which is more appropriate for short-term decisions. In this case, the one-time order of 5,000 units can be executed within the excess production capacity and will not incur any additional costs. Therefore, the variable costing approach will provide a more accurate reflection of the company's profitability for this specific order. Absorption costing, on the other hand, considers all manufacturing costs, including fixed overhead costs such as the yearly fixed manufacturing overhead of $20,000. This approach is more suitable for long-term decisions, as fixed costs are spread over a longer period of time. However, in this case, as the order is short-term, absorption costing may not provide an accurate reflection of the profitability of the order.