Groovelex Inc.reports the following information for the year ended December 31,2014:
- The operating profit calculated using variable costing and absorption costing amounted to $9,270 and $11,250,respectively.There were no beginning inventories.Determine the total number of units produced during 2014.
A)500 units
B)620 units
C)513 units
D)120 units

Question

Groovelex Inc.reports the following information for the year ended December 31,2014: 
- The operating profit calculated using variable costing and absorption costing amounted to $9,270 and $11,250,respectively.There were no beginning inventories.Determine the total number of units produced during 2014.
A)500 units 
B)620 units 
C)513 units 
D)120 units

Quizplus · Accepted Answer

Operating profit under absorption costing includes fixed manufacturing overhead expenses, which is not the case in variable costing. The difference in operating profit is equal to the fixed manufacturing overhead expenses, which is calculated by multiplying the number of units produced during the year by the fixed overhead rate.

Therefore, using the given information, we can calculate the fixed overhead rate as follows:

Fixed manufacturing overhead = Operating profit under absorption costing – Operating profit under variable costing
Fixed manufacturing overhead = $11,250 - $9,270
Fixed manufacturing overhead = $1,980

Fixed overhead rate = Fixed manufacturing overhead ÷ Number of units produced
Fixed overhead rate = $1,980 ÷ Number of units produced

To calculate the number of units produced, we need to find out the point at which the fixed cost is absorbed into the cost of goods sold. This point is where the number of units sold equals the number of units produced.

Let's assume that the selling price per unit was $20 and the variable cost per unit was $12. Using this information, we can calculate the contribution margin per unit as follows:

Contribution margin per unit = Selling price per unit – Variable cost per unit
Contribution margin per unit = $20 - $12
Contribution margin per unit = $8

Therefore, to absorb the fixed overhead cost of $1,980, Groovelex Inc. needs to sell:

Number of units sold = Fixed manufacturing overhead ÷ Contribution margin per unit
Number of units sold = $1,980 ÷ $8
Number of units sold = 247.5 units (rounded to the nearest whole number)

Since there were no beginning inventories, the total number of units produced during 2014 is equal to the number of units sold, which is 247.5 units rounded up to the nearest whole number, which is 248 units.