Swola Company reports the following annual cost data for its single product.
$\begin{array}{ll}
\text { Normal production level } & 75,000 \text { units } \
\text { Direct materials } & \$ 1.25 \text { per unit } \
\text { Direct labor } & \$ 2.50 \text { per unit } \
\text { Variable overhead } & \$ 3.75 \text { per unit } \
\text { Fixed overhead } & \$ 300,000 \text { in total }
\end{array}$

This product is normally sold for $25 per unit.If Swola increases its production to 200,000 units,while sales remain at the current 75,000 unit level,by how much would the company's gross margin increase or decrease under absorption costing?
A) $187,500 increase.
B) $112,500 increase.
C) There will be no change in gross margin.
D) $112,500 decrease.
E) $187,500 decrease.

Question

Swola Company reports the following annual cost data for its single product.
$\begin{array}{ll}
\text { Normal production level } & 75,000 \text { units } \
\text { Direct materials } & \$ 1.25 \text { per unit } \
\text { Direct labor } & \$ 2.50 \text { per unit } \
\text { Variable overhead } & \$ 3.75 \text { per unit } \
\text { Fixed overhead } & \$ 300,000 \text { in total }
\end{array}$

This product is normally sold for $25 per unit.If Swola increases its production to 200,000 units,while sales remain at the current 75,000 unit level,by how much would the company's gross margin increase or decrease under absorption costing?
A) $187,500 increase.
B) $112,500 increase.
C) There will be no change in gross margin.
D) $112,500 decrease.
E) $187,500 decrease.

Quizplus · Accepted Answer

Under absorption costing, fixed overhead is allocated to each unit produced. Increasing production to 200,000 units reduces the fixed overhead cost per unit, thus decreasing the cost of goods sold for the 75,000 units sold. This results in an increase in gross margin by $187,500.

Swola Company Reports the Following Annual Cost Data for Its