Red River Company sells its product for $12,000 per unit. Variable costs per unit are: Manufacturing overhead -$8,000
Selling and administrative -$150
Fixed costs are:
Manufacturing overhead -$30,000
Selling and administrative -$40,000
Red River had no beginning inventory at January 1, 2010. Production was 20 units each year in 2010, 2011, and 2012. Sales were 20 units in 2010, 16 units in 2011, and 24 units in 2012.
Income/(Loss) under absorption costing for 2011 is:
A)$12,000.
B)($2,400).
C)($7,000).
D)$7,000.
E)$16,400

Question

Quizplus · Accepted Answer

Under absorption costing, fixed overhead costs are included in the cost of the product. 
Total fixed overhead costs for 2011 = $30,000 + $40,000 = $70,000
Fixed overhead cost per unit = $70,000/16 units = $4,375
Total variable cost per unit = $8,000 + $150 = $8,150
Total cost per unit = $8,150 + $4,375 = $12,525
Revenue per unit = $12,000
Gross profit per unit = $12,000 - $12,525 = ($525)
Total gross profit for 2011 = ($525) x 16 units = ($8,400)
Therefore, the income/(loss) under absorption costing for 2011 is ($8,400 - $2,400) = ($10,800), which is closest to choice B ($2,400 loss).

Red River Company Sells Its Product for $12,000 Per Unit