<p>Martol Company reports the following cost data for its single product. Martol

Question

<p>Martol Company reports the following cost data for its single product. Martol regularly sells 20,000 units of its product at a price of $80 per unit.<br /><br /> <br /> Direct materials $10 per unit <br /> Direct labor $12 per unit <br /> Overhead costs for the year <br /> Variable overhead $3 per unit <br /> Fixed overhead per year $40,000 <br /> Normal production level (in units) 20,000 units <br /><br />If Martol 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 under absorption costing?</p>

Explanation / Answer

Normal Production Direct materials $10 per unit Direct labor $12 per unit Variable overhead $3 per unit Fixed overhead per unit $2 per unit ( $40,000 ÷ 20,000) ---------------- Total cost $27 per unit Sale price $80 per unit Gross margin $53 per unit Increased Production Direct materials $10 per unit Direct labor $12 per unit Variable overhead $3 per unit Fixed overhead per unit $1 per unit ( $40,000 ÷ 40,000) ---------------- Total cost $26 per unit Sale price $80 per unit Gross margin $54 per unit Change in Gross Margin $1 per unit.

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