3:54 PM ezto.mheducation.com ooo T-Mobile Blazer Chemical produces and sells an

Question

3:54 PM ezto.mheducation.com ooo T-Mobile Blazer Chemical produces and sells an ice-melting granular used on roadways and sidewalks in winter. It annually produces and sells about 100 tons of its granular. In its nine-year history, the company has never reported a net loss. However, because of this years unusually mild winter, projected demand for its product is only 60 tons. Based on its predicted production and sales of 60 tons, the company projects the following income statement (under absorption costing) Sales (80 Cost of goeds sold (80 ons a$4,000 per on) 1.280,000 Seling and adinisbative expenses

Explanation / Answer

Yes,Absorption costing result in an increase in net income if a company increases its production and its inventory. This occurs because fixed manufacturing overhead is allocated to more production units from which some will be reported as inventory.

Fixed Cost 750000 Now variable cost per unit will be same irrespective of the level of production its $3500 according to the no. of units produced it will be multiplied But under absorption costing fixed manufacturing overhead per unit will decrease with the increase in output thereby decreasing the COGS Production Cost of Good Sold 60 tons 100 tons Fixed Cost 750000 750000 Fixed cost per ton 12500 7500 Variable cost per ton 3500 3500 Cost of Good Sold perunit 16000 11000 No. of tons sold 60 Cost of good sold if 100 tons is produced 660000 11000*60 So now if this decision is taken to produce more than the Income statemnt Sales $1,260,000 Less: COGS 660000 Gross margin $600,000 Less: Sellimg & administrative Overhead 318600 Net Income $281,400

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