Harold Corporation just started business in January 2012. They had no beginning inventories. During 2012 they manufactured 12,000 units of product, and sold 10,000 units. The selling price of each unit was $20. Variable manufacturing costs were $4 per unit, and variable selling and administrative costs were $2 per unit. Fixed manufacturing costs were $24,000 and fixed selling and administrative costs were $6,000. What would be the Harold Corporations net income for 2012 using absorption costing?
A) $114,000
B) $110,000
C) $4,000
D) $106,000

Question

Quizplus · Accepted Answer

Under absorption costing, all manufacturing costs (variable and fixed) are included in the cost of the product. The cost of goods sold for 10,000 units is calculated as: (Variable manufacturing cost per unit + Fixed manufacturing cost per unit) * Units sold = ($4 + $2) * 10,000 = $60,000. The revenue from sales is 10,000 units * $20 = $200,000. The gross profit is $200,000 - $60,000 = $140,000. Subtracting fixed selling and administrative costs of $6,000 gives a net income of $134,000. However, the fixed manufacturing cost per unit is $24,000/12,000 = $2, so the correct cost per unit is $6, not $4. Therefore, the correct calculation is: Revenue ($200,000) - COGS (10,000 * $6 = $60,000) - Variable selling/admin costs (10,000 * $2 = $20,000) - Fixed selling/admin costs ($6,000) = $114,000.

Harold Corporation Just Started Business in January 2012