US CMA Part 1 · Chapter 4 · Question 4 of 22
Westbury Inc. sells a product for $80. Variable production cost is $36 per unit and variable selling cost is $4 per unit. Fixed manufacturing overhead is $360,000 per year, applied on normal output of 30,000 units, and fixed selling and administrative costs are $150,000. There was no beginning inventory; 30,000 units were produced and 27,000 were sold. What is operating income under absorption costing?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) $606,000
Explanation
Fixed overhead rate = $360,000 / 30,000 = $12; absorption cost per unit = $36 + $12 = $48. Gross margin = 27,000 x ($80 - $48) = $864,000. Less variable selling $108,000 and fixed S&A $150,000 = $606,000. Variable costing income would be $570,000; the $36,000 difference is the fixed overhead in the 3,000 units of ending inventory.
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