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20,000 units are produced and 15,000 sold at $50 each. Variable manufacturing cost is $25 per unit, fixed manufacturing costs are $150,000, variable selling is $5 per unit and fixed selling costs are $50,000. What is absorption operating income?
A$100,000
B$137,500
C$112,500
D$262,500
Answer & Solution
Correct answer: B. $137,500
1. Sales are 15,000 units times $50, which is $750,000.
2. Fixed cost per unit is $150,000 divided by 20,000 units produced, which is $7.50.
3. Full cost per unit is $25 plus $7.50, which is $32.50.
4. Cost of goods sold is 15,000 units times $32.50, which is $487,500.
5. Gross profit is $750,000 minus $487,500, which is $262,500.
6. Selling and administrative expenses are 15,000 times $5 plus $50,000, which is $125,000.
7. Operating income is $262,500 minus $125,000, which is $137,500.
8. $262,500 is gross profit, so stopping there skips the selling and administrative charge.
_Source: Jonick, Principles of Managerial Accounting (UNG Press, CC BY-SA 4.0), section 6.5 Analysis of Variable and Absorption Costing_
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