A company that produces a single product had a net operating income of $87,000 u

Question

A company that produces a single product had a net operating income of $87,000 using variable costing and a net operating income of $119,240 using absorption costing. Total fixed manufacturing overhead was $57,120 and production was 11,200 units both this year and last year. Last year was the first year of operations. Between the beginning and the end of the year, the inventory level: (Do not round intermediate computation and round your final answer to nearest whole number.)

a) decreased by 6,322 units

b) increased by 6,322 units

c) increased by 32,240 units

d) decreased by 32,240 units

Explanation / Answer

Between the beginning and the end of the year, the inventory level:

Answer : b) increased by 6,322 units

=> Amount of Fixed manufacturing overhead under the closing inventory is $119240 - $87000 = $32240

Percentage of increase in the closing inventory= 32240 / 57120 = 56.44%

Due to the transfer of Fixed manufacturing overhead to Closing Inventory, thus, between the beginning and the end of the year, the inventory level increased by 11200*56.44% = 6322 units:

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