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15,000 units are sold at $50 each, cost of goods sold under absorption costing is $575,000 and selling and administrative expenses are $125,000. What is absorption operating income?
A$100,000
B$137,500
C$175,000
D$50,000
Answer & Solution
Correct answer: D. $50,000
1. Sales are 15,000 units times $50, which is $750,000.
2. Gross profit is $750,000 minus cost of goods sold of $575,000, which is $175,000.
3. Selling and administrative expenses of $125,000 are then deducted.
4. $175,000 minus $125,000 gives operating income of $50,000.
5. $175,000 is gross profit, which is one line short of the answer.
6. Variable costing would still report $100,000 here, because production volume never touches it.
_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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