Swisher, Incorporated reports the following annual cost data for its single product.
$$\begin{array} { l l }
\text { Normal production level } & 30,000 \text { units } \
\text { Direct materials } & \$ 6.40 \text { per unit } \
\text { Direct labor } & \$ 3.93 \text { per unit } \
\text { Variable overhead } & \$ 5.80 \text { per unit } \
\text { Fixed overhead } & \$ 150,000 \text { in total }
\end{array}$$
This product is normally sold for $48 per unit. If Swisher increases its production to 50,000 units, while sales remain at the current 30,000 unit level, by how much would the company's gross margin increase or decrease under absorption costing?

Question

Swisher, Incorporated reports the following annual cost data for its single product. 
$$\begin{array} { l l } 
\text { Normal production level } & 30,000 \text { units } \
\text { Direct materials } & \$ 6.40 \text { per unit } \
\text { Direct labor } & \$ 3.93 \text { per unit } \
\text { Variable overhead } & \$ 5.80 \text { per unit } \
\text { Fixed overhead } & \$ 150,000 \text { in total }
\end{array}$$
This product is normally sold for $48 per unit. If Swisher increases its production to 50,000 units, while sales remain at the current 30,000 unit level, by how much would the company's gross margin increase or decrease under absorption costing?

Quizplus · Accepted Answer

Under absorption costing, fixed overhead is spread over more units when production increases, reducing the cost per unit. Producing 50,000 units instead of 30,000 units decreases the fixed overhead cost per unit, increasing the gross margin by $60,000.

Swisher, Incorporated Reports the Following Annual Cost Data for Its