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By how much does gross margin increase or decrease under absorption costing?
Tramor Company reports the following cost data for its single product. The company regularly sells 20,000 units of its product at a price of $80 per unit.
Direct materials $10 per unit
Direct labor $12 per unit
Overhead costs for the year
Variable overhead $3 per unit
Fixed overhead per year $40,000
Normal production level (in units) 20,000 units
If Tramor doubles its production to 40,000 units while sales remain at the current 20,000 unit level, by how much would the company’s gross margin increase or decrease under absorption costing?
Please explain why.
1 Answer
- Don GLv 710 years agoFavorite Answer
At 20,000 units per year, VC - 10 + 12 + 3 = 25 plus fixed overhead of 2 per unit. Total cost 27
Produce 20,000 at 27 each
Sell 20,000 at 53 Gross Profit = 1,060,000
At 40,000 units fixed oh drops to 1 per unit. Total cost 26
Produce 40,000 at 26 each.
Sell 20,000 at 54 Gross Profit = 1,080,000
Under Absorption costing, which is required by FASB, gross margin increases by the 20,000 of fixed cost that is carried in Ending inventory.