Chicago began business at the start of the current year. The company planned to

Question

Chicago began business at the start of the current year. The company planned to produce 25,000 units, and actual production conformed to expectations. Sales totaled 22,000 units at $30 each. Costs incurred were:
Fixed Manufacturing Over Head $150,000
Fixed Selling & Adminstration Cost $100,000
Variable Manufacturing Cost Per Unit $8.00
Variable Selling&Adminstrative per Unit 2.00
If there were no variances, the company's absorption-costing net income would be:
A. $190,000.
B. $202,000.
C. $208,000.
D. $220,000.
E. some other amount.

Explanation / Answer

Absorption costing: includes all manufacturing costs --- including direct materials, direct labor, and BOTH variable and fixed manufacturing overhead. Absorption Costing = Full Costing Under absorption costing, fixed overhead is a product cost until sold. Absorption costing makes no distinction between fixed and variable costs thus is not suited for CVP analysis. Sales less Absorption Cost of Goods Sold will equal Gross Profit Unit Cost Under Absorption Costing: Variable Manufacturing Cost Per Unit $8.00 Fixed Manufacturing Over Head pu = $150,000/25000 = $6.00 SO Unit Cost Under Absorption Costing = $14.00 So COGS for 22000 units = 22000*$14 = $308,000 Sales Revenue = 22000*$30 = $660,000 So Gross Profit = $352,000 Less : Var Selling cost for 22000 units = 22000*$2 = $44,000 Less : Fixed Selling & Adminstration Cost $100,000 ------------------------------------------------------------- Net Income = $208,000 So Ans is C) $208,000 Note that ending invenory will be 3000 units @$14 = $42000

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