Shipp Ltd. budgets the following costs for a normal monthly volume of 500 units selling for $4,000 each. The profit (loss) using absorption costing when 500 units are produced and 400 units are sold is
A) $840,000 loss
B) $160,000 profit
C) $480,000 profit
D) $720,000 loss

Question

Quizplus · Accepted Answer

To calculate the profit (loss) using absorption costing, we need to determine the total cost and total revenue for producing and selling 500 units, and then adjust for the fact that only 400 units were actually sold.

Total cost = Fixed costs + (Variable costs per unit x number of units produced)
Total cost = $1,000,000 + ($2,000 x 500)
Total cost = $2,000,000

Total revenue = Sales price per unit x number of units sold
Total revenue = $4,000 x 400
Total revenue = $1,600,000

To adjust for the fact that only 400 units were sold, we need to calculate the cost of goods sold (COGS) for those units, and then subtract it from the adjusted revenue:

COGS = Total cost / number of units produced x number of units sold
COGS = $2,000,000 / 500 x 400
COGS = $1,600,000

Adjusted revenue = Total revenue - COGS
Adjusted revenue = $1,600,000 - $1,600,000
Adjusted revenue = $0

Since the adjusted revenue is $0, the profit (loss) using absorption costing is equal to the total cost for producing the 500 units, which is $2,000,000. However, since only 400 units were sold, the company incurred a loss of $720,000 (500-400 units) using absorption costing. Therefore, the correct answer is choice D.

Shipp Ltd Budgets the Following Costs for a Normal Monthly Volume