Last year, Walsh Company manufactured 25,000 units and sold 22,000 units. Production costs were as follows:
$\begin{array}{|l|r|}
\hline \text { Direct materials } & \$ 100,000 \
\hline \text { Direct labour } & 75,000 \
\hline \text { Variable manufacturing overhead } & 50,000 \
\hline \text { Fixed manufacturing overhead } & 75,000 \
\hline
\end{array}$Total sales were $440,000, total variable selling and administrative expenses were $110,000, and total fixed selling and administrative expenses were $45,000. There was no beginning inventory. Assume that direct labour is a variable cost.

-Under absorption costing,what was the gross margin?
A) $21,000.
B) $66,000.
C) $176,000.
D) $242,000.

Question

Last year, Walsh Company manufactured 25,000 units and sold 22,000 units. Production costs were as follows:
$\begin{array}{|l|r|}
\hline \text { Direct materials } & \$ 100,000 \
\hline \text { Direct labour } & 75,000 \
\hline \text { Variable manufacturing overhead } & 50,000 \
\hline \text { Fixed manufacturing overhead } & 75,000 \
\hline
\end{array}$Total sales were $440,000, total variable selling and administrative expenses were $110,000, and total fixed selling and administrative expenses were $45,000. There was no beginning inventory. Assume that direct labour is a variable cost.

-Under absorption costing,what was the gross margin?
A) $21,000.
B) $66,000.
C) $176,000.
D) $242,000.

Quizplus · Accepted Answer

Under absorption costing, all manufacturing costs (direct materials, direct labor, variable manufacturing overhead, and fixed manufacturing overhead) are included in the cost of goods sold. The cost of goods manufactured is the sum of direct materials ($100,000), direct labor ($75,000), variable manufacturing overhead ($50,000), and fixed manufacturing overhead ($75,000), totaling $300,000. Since 25,000 units were manufactured and 22,000 units were sold, the cost of goods sold is based on the units sold. The cost per unit is $300,000 / 25,000 units = $12 per unit. Therefore, the cost of goods sold for the 22,000 units sold is 22,000 units * $12 = $264,000. The gross margin is sales ($440,000) minus cost of goods sold ($264,000), which equals $176,000.

Last Year, Walsh Company Manufactured 25,000 Units and Sold 22,000