Classix Products reported $28 000 in net profit for the year using variable costing. The company had no units in beginning inventory, planned and actual production was 30 000 units, and sales were 25 000 units during the year. Variable manufacturing costs were $15 per unit and total budgeted fixed manufacturing overhead was $150 000. There was no underapplied or overapplied overhead reported during the year. Determine the net profit under absorption costing.
A) $28 000
B) $30 000
C) $53 000
D) $58 000

Question

Quizplus · Accepted Answer

Under variable costing, only variable costs are included in the cost of goods sold. However, under absorption costing, both variable and fixed manufacturing overhead costs are included in the cost of goods sold.

To calculate net profit under absorption costing, we need to add the fixed manufacturing overhead cost to the cost of goods sold:

Fixed manufacturing overhead cost per unit = $150,000/30,000 units = $5 per unit
Cost of goods sold per unit under absorption costing = Variable manufacturing cost per unit + Fixed manufacturing overhead cost per unit = $15 + $5 = $20
Cost of goods sold under absorption costing = Cost of goods sold per unit x Number of units sold = $20 x 25,000 = $500,000
Net profit under absorption costing = Sales - Cost of goods sold - Selling and administrative expenses
Net profit under absorption costing = ($20 x 25,000) - $150,000 - Selling and administrative expenses
Net profit under absorption costing = $500,000 - $150,000 - Selling and administrative expenses

We are not given any information about selling and administrative expenses, so we can't calculate the exact net profit under absorption costing. However, we know that it must be greater than $28,000 (the net profit reported under variable costing) since absorption costing includes additional costs in the cost of goods sold. The only answer choice that reflects a net profit greater than $28,000 is C, $53,000.

Classix Products Reported $28 000 in Net Profit for the Year