Budgeted production was 10,000 units, with budgeted fixed production overheads of $80,000, absorbed per unit. Actual production was 11,000 units and sales were 10,500 units at $50 each. Variable production cost is $30 per unit. Actual fixed production overheads were $82,000, and fixed selling costs were $20,000. There was no opening inventory. What is the profit under absorption costing?

Correct answer: D) $112,000

Explanation

OAR = 80,000 / 10,000 = $8, so full cost = $38 per unit. Sales 10,500 x 50 = 525,000, less cost of sales 10,500 x 38 = 399,000. Absorbed overheads = 11,000 x 8 = 88,000 against actual 82,000, so overheads are over-absorbed by $6,000 (added to profit). Profit = 525,000 - 399,000 + 6,000 - 20,000 = $112,000. Check: marginal profit = 10,500 x 20 - 82,000 - 20,000 = $108,000, plus the 500-unit inventory increase x $8 = $4,000 gives $112,000.