This year, Roberts Company's income under absorption costing was £2,000 lower than its income under variable costing. The company sold 8,000 units during the year, and its variable costs were £8 per unit, of which £2 was variable selling expense. If production cost was £10 per unit under absorption costing, then how many units did the company produce during the year

Question

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Explanation:Under absorption costing, fixed manufacturing costs are included in the cost of goods sold. Under variable costing, only variable manufacturing costs are included in the cost of goods sold. Therefore, the difference between absorption costing income and variable costing income is equal to the fixed manufacturing costs.In this case, the difference between absorption costing income and variable costing income is £2,000. Therefore, the fixed manufacturing costs are £2,000.The total variable costs are £8 per unit, of which £2 is variable selling expense. Therefore, the variable manufacturing costs are £6 per unit.The total production cost under absorption costing is £10 per unit. Therefore, the fixed manufacturing costs per unit are £4 per unit.The number of units produced during the year is equal to the fixed manufacturing costs divided by the fixed manufacturing costs per unit.Therefore, the number of units produced during the year is £2,000 / £4 = 500 units.The total number of units sold during the year is 8,000 units. Therefore, the number of units in ending inventory is 8,000 units - 500 units = 7,500 units.

This Year, Roberts Company's Income Under Absorption Costing Was £2,000