Use the following information for items
Green Company sells its product for $11,000 per unit.Variable costs per unit are: manufacturing, $6,000; and selling and administrative, $125.Fixed costs are: $30,000 manufacturing overhead, and $40,000 selling and administrative.There was no beginning inventory at 1/1/14.Production was 20 units per year in 2014-2016.Sales were 20 units in 2014, 16 units in 2015, and 24 units in 2016.
-Income under absorption costing for 2015 is
A)$ 8,000.
B)$14,000.
C)$16,000.
D)$22,000.

Question

Use the following information for items 
Green Company sells its product for $11,000 per unit.Variable costs per unit are: manufacturing, $6,000; and selling and administrative, $125.Fixed costs are: $30,000 manufacturing overhead, and $40,000 selling and administrative.There was no beginning inventory at 1/1/14.Production was 20 units per year in 2014-2016.Sales were 20 units in 2014, 16 units in 2015, and 24 units in 2016.
-Income under absorption costing for 2015 is
A)$ 8,000.
B)$14,000.
C)$16,000.
D)$22,000.

Quizplus · Accepted Answer

Under absorption costing, fixed manufacturing overhead costs are included in the cost of the product. Thus, the cost per unit will be:

Cost per unit = Variable manufacturing cost per unit + Fixed manufacturing overhead per unit
Cost per unit = $6,000 + ($30,000 ÷ 20 units)
Cost per unit = $7,500

In 2015, only 16 units were sold. Thus, the cost of goods sold (COGS) will be:

COGS = Cost per unit × Number of units sold
COGS = $7,500 × 16
COGS = $120,000

The total cost incurred in 2015 will be:

Total cost = Variable manufacturing cost + Fixed manufacturing overhead + Variable selling and administrative cost + Fixed selling and administrative cost
Total cost = ($6,000 + $125) × 16 + $40,000 + $30,000
Total cost = $101,000

Thus, the income for 2015 will be:

Income = Sales - COGS - Total selling and administrative expenses
Income = ($11,000 × 16) - $120,000 - $40,000
Income = $176,000 - $160,000
Income = $16,000

Use the Following Information for Items