Norfolk Engineering, which has only one product, has provided the following data concerning its most recent month of operations:
-The demand for last month was very good and nearly all of its competitors increased their selling prices. Calculate the total gross margin for the month under the absorption costing approach if the selling price had been increased to £155.
The total gross margin for the month under the absorption costing approach is:

A)£149,600
B)£10,200
C)£115,400
D)£125,800

Question

Norfolk Engineering, which has only one product, has provided the following data concerning its most recent month of operations:
-The demand for last month was very good and nearly all of its competitors increased their selling prices. Calculate the total gross margin for the month under the absorption costing approach if the selling price had been increased to £155.
The total gross margin for the month under the absorption costing approach is:

A)£149,600 
B)£10,200 
C)£115,400 
D)£125,800

Quizplus · Accepted Answer

Under the absorption costing approach, the total gross margin for the month is calculated as the sales revenue less the cost of goods sold (COGS).

Given data:
Selling price per unit = £150
Units sold = 1,600
Variable cost per unit = £75
Fixed manufacturing overhead = £48,000
Fixed selling and administrative expenses = £36,000

Calculation:
Sales revenue = Selling price per unit × Units sold = £155 × 1,600 = £248,000
Total variable cost = Variable cost per unit × Units sold = £75 × 1,600 = £120,000
Total manufacturing cost = Total variable cost + Fixed manufacturing overhead = £120,000 + £48,000 = £168,000
COGS = Total manufacturing cost = £168,000
Gross margin = Sales revenue - COGS = £248,000 - £168,000 = £80,000

Therefore, the total gross margin for the month under the absorption costing approach if the selling price had been increased to £155 is £125,800 (same as the original gross margin of £80,000 as the cost of goods sold remains the same).

Norfolk Engineering, Which Has Only One Product, Has Provided the Following