Swola Company reports the following annual cost data for its single product. 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 income increase or decrease under absorption costing?
A) $187,500 increase.
B) $112,500 increase.
C) There will be no change in income.
D) $112,500 decrease.
E) $187,500 decrease.

Question

Swola Company reports the following annual cost data for its single product.  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 income increase or decrease under absorption costing?
A) $187,500 increase. 
B) $112,500 increase. 
C) There will be no change in income. 
D) $112,500 decrease. 
E) $187,500 decrease.

Quizplus · Accepted Answer

$300,000/75,000 units = $4 FOH per unit at 75,000 unit level
$300,000/200,000 units = $1.50 FOH per unit at 200,000 unit level
$4 − 1.50 = $2.50 less FOH cost in each unit sold
$2.50 × 75,000 = $187,500 gross margin increase

Swola Company Reports the Following Annual Cost Data for Its