Swisher,Incorporated reports the following annual cost data for its single product:
$\begin{array}{ll}
\text { Normal production level } & 30,000 \text { units } \
\text { Direct materials } & \$ 6.40 \text { per unit } \
\text { Direct labor } & \$ 3.93 \text { per unit } \
\text { Variable overhead } & \$ 5.80 \text { per unit } \
\text { Fixed overhead } & \$ 150,000 \text { in total }
\end{array}$

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?
A) $60,000 decrease.
B) $90,000 decrease.
C) There is no change in gross margin.
D) $90,000 increase.
E) $60,000 increase.

Question

Swisher,Incorporated reports the following annual cost data for its single product:
$\begin{array}{ll}
\text { Normal production level } & 30,000 \text { units } \
\text { Direct materials } & \$ 6.40 \text { per unit } \
\text { Direct labor } & \$ 3.93 \text { per unit } \
\text { Variable overhead } & \$ 5.80 \text { per unit } \
\text { Fixed overhead } & \$ 150,000 \text { in total }
\end{array}$

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?
A) $60,000 decrease.
B) $90,000 decrease.
C) There is no change in gross margin.
D) $90,000 increase.
E) $60,000 increase.

Quizplus · Accepted Answer

Under absorption costing, fixed overhead is allocated to each unit produced. Increasing production to 50,000 units reduces the fixed overhead cost per unit, thus decreasing the cost of goods sold for the 30,000 units sold. This results in a $60,000 increase in gross margin because the fixed overhead per unit decreases from $5 (150,000/30,000) to $3 (150,000/50,000), saving $2 per unit on 30,000 units sold.

Swisher,Incorporated Reports the Following Annual Cost Data for Its Single