Gallison Company's net profit under absorption costing was $15 000 higher than under variable costing. During the year, the company produced 20 000 units for total variable production costs of $80 000. If fixed manufacturing overhead was $40 000, how many units were sold?

Question

Quizplus · Accepted Answer

Under absorption costing, fixed manufacturing overhead is included in the cost of goods sold. However, under variable costing, fixed manufacturing overhead is treated as a period expense and is not included in the cost of goods sold.

Given that Gallison's net profit under absorption costing was $15,000 higher than under variable costing, this indicates that fixed manufacturing overhead per unit is greater than the difference between variable cost and absorption cost per unit.

We can calculate the difference between variable cost and absorption cost per unit as follows:

Variable production cost per unit = $80,000 ÷ 20,000 units = $4 per unit

Absorption cost per unit = Variable production cost per unit + Fixed manufacturing overhead per unit 
Fixed manufacturing overhead per unit = $40,000 ÷ 20,000 units = $2 per unit 
Absorption cost per unit = $4 per unit + $2 per unit = $6 per unit

The difference between variable cost and absorption cost per unit is $6 - $4 = $2 per unit. This means that fixed manufacturing overhead per unit is greater than $2 per unit.

To find out how many units were sold, we need to use the following formula:

Units sold = Units produced - Increase in inventory 
We know that Gallison produced 20,000 units, but we don't know how much of that was sold.

We can calculate the increase in inventory using the difference in net profit between variable costing and absorption costing:

Increase in inventory = Net profit under absorption costing - Net profit under variable costing 
Increase in inventory = $15,000 ÷ ($6 per unit - $4 per unit) 
Increase in inventory = $15,000 ÷ $2 per unit 
Increase in inventory = 7,500 units

This means that 7,500 units were added to inventory during the year. Therefore, the number of units sold is:

Units sold = 20,000 - 7,500 = 12,500 units

Therefore, the best choice is B) 12,500 units.

Gallison Company's Net Profit Under Absorption Costing Was $15 000