Craft Company produces a single product.Last year,the company had a net operating income of $80,000 using absorption costing and $74,500 using variable costing.The fixed manufacturing overhead cost was $5 per unit.There were no beginning inventories.If 21,500 units were produced last year,then sales last year were:
A)16,000 units
B)20,400 units
C)22,600 units
D)27,000 units

Question

Quizplus · Accepted Answer

Explanation:Variable costing net operating income = Contribution margin - Variable manufacturing costs$74,500 = (Sales - Variable manufacturing costs) - Variable manufacturing costs$74,500 = Sales - 2 * Variable manufacturing costsAbsorption costing net operating income = Sales - Total manufacturing costs$80,000 = Sales - (Variable manufacturing costs + Fixed manufacturing costs)$80,000 = Sales - (2 * Variable manufacturing costs + $5)Subtracting the variable costing net operating income from the absorption costing net operating income, we get:$80,000 - $74,500 = Sales - (2 * Variable manufacturing costs + $5) - (Sales - 2 * Variable manufacturing costs)$5,500 = $5Sales = 2 * Variable manufacturing costs + $5,500Sales = 2 * ($74,500 / 21,500) + $5,500Sales = $7 + $5,500Sales = $20,400

Craft Company Produces a Single Product