Question

Computing absorption costing gross profit

Refer to your answers to Short Exercise S21-6. Product X sells for \(175 per unit. Assume no beginning inventories. Calculate the gross profit using absorption costing when Adamson:

1. Produces and sells 2,000 units.
2. Produces 2,500 units and sells 2,000 units.
3. Produces 5,000 units and sells 2,000 units.

S21-6 Direct materials \) 41 per unit Direct labor 57 per unit Variable manufacturing overhead 7 per unit Fixed manufacturing overhead 20,000 per ye

Short answer

Answer

1. Gross profit =$120,000
2. Gross profit =$124,000
3. Gross profit =$132,000

Step-by-step solution

Calculation of unit product cost using absorption costing

Particulars	2,000 Units	2,500 Units	5,000 Units
Direct material	$41	$41	$41
Direct labor	$57	$57	$57
Variable manufacturing overhead	$7	$7	$7
Fixed manufacturing overhead	$20,000/2,000 =$10	$20,000/2,500 =$8	$20,000/5,000 =$4
Total unit product cost	$115	$113	$109

Calculation of gross profit using absorption costing (a, b, c):

Particulars	Produce and sell 2,000 units	Produce 2,500 and sell 2,000 units	Produce 5,000 and sell 2,000 units
Net sales revenue	2,000x$175 =$350,000	2,000x$175 =$350,000	2,000x$175 =$350,000
Less: Cost of goods sold (Units sold x Unit product cost	2,000x$115 =$230,000	2,000x$113 =$226,000	2,000x$109 =$218,000
Gross profit	$120,000	$124,000	$132,000