Favaz began business at the start of this year and had the following costs: variable manufacturing cost per unit, $9; ﬁxed manufacturing costs, $60,000; variable selling and administrative costs per unit, $2; and ﬁxed selling and administrative costs, $220,000.The company sells its units for $45 each.Additional data follow: There were no variances. The income (loss) under absorption costing is:
A)$(7,500).
B)$9,000.
C)$15,000.
D)$18,000.
E)None of the answers is correct.

Question

Favaz began business at the start of this year and had the following costs: variable manufacturing cost per unit, $9; ﬁxed manufacturing costs, $60,000; variable selling and administrative costs per unit, $2; and ﬁxed selling and administrative costs, $220,000.The company sells its units for $45 each.Additional data follow:  There were no variances. The income (loss) under absorption costing is:
A)$(7,500). 
B)$9,000. 
C)$15,000. 
D)$18,000. 
E)None of the answers is correct.

Quizplus · Accepted Answer

Under absorption costing, all manufacturing costs (both fixed and variable) are included in the cost of each unit. Therefore, the cost per unit is:

Variable manufacturing cost per unit + Fixed manufacturing cost per unit 
= $9 + ($60,000 ÷ number of units produced)

Using the information given, the total cost per unit is:

$9 + ($60,000 ÷ 10,000 units) 
= $15 per unit

The contribution margin per unit is:

Selling price per unit - Variable manufacturing cost per unit - Variable selling and administrative cost per unit 
= $45 - $9 - $2 
= $34 per unit

Using the contribution margin per unit and the total cost per unit, we can calculate the operating income as follows:

Total contribution margin - Total cost 
= (Number of units sold x Contribution margin per unit) - (Number of units sold x Cost per unit) - Fixed selling and administrative costs 
= (10,000 x $34) - (10,000 x $15) - $220,000 
= $340,000 - $150,000 - $220,000 
= -$30,000

Therefore, the income (loss) under absorption costing is $(7,500) (negative $30,000/4 = negative $7,500).

The correct answer choice is D.

Favaz Began Business at the Start of This Year and Had