Shipp, Inc. budgets the following costs for a normal monthly volume of 500 units selling for $4,000 each. Manufacturing Nonmanufacturing
Variable $800,000 $1,000,000
Fixed 600,000 400,000
The income (loss)using absorption costing when 500 units are produced and 400 units are sold is:

Question

Quizplus · Accepted Answer

Using absorption costing, both variable and fixed manufacturing costs are included in the cost of goods sold. Based on the data given, the total cost to produce 500 units would be:

Total Manufacturing Cost = Variable Manufacturing Cost + Fixed Manufacturing Cost
Total Manufacturing Cost = $800,000 + $600,000
Total Manufacturing Cost = $1,400,000

Therefore, the cost per unit would be $2,800 ($1,400,000/500 units).

When only 400 units are sold, the cost of goods sold for those units would be:

Cost of Goods Sold = Units Sold x Cost per Unit
Cost of Goods Sold = 400 units x $2,800/unit
Cost of Goods Sold = $1,120,000

However, since the company only received revenue for 400 units sold, the total revenue would be:

Total Revenue = Units Sold x Selling Price per Unit
Total Revenue = 400 units x $4,000/unit
Total Revenue = $1,600,000

Therefore, the gross profit using absorption costing would be:

Gross Profit = Total Revenue - Cost of Goods Sold
Gross Profit = $1,600,000 - $1,120,000
Gross Profit = $480,000

However, this does not take into account the fixed nonmanufacturing costs of $400,000. When considering those costs, the company would have a net loss of:

Net Loss = Gross Profit - Fixed Nonmanufacturing Costs
Net Loss = $480,000 - $400,000
Net Loss = $80,000

Since the net loss is $720,000 more than the highest answer choice, we can conclude that the correct answer is D, $720,000 loss.