Question

During its first year of operations, Silverman Company paid $14,000 for direct materials and $19,000 for production workers' wages. Lease payments and utilities on the production facilities amounted to $17,000 while general, selling, and administrative expenses totaled $8,000. The company produced 5,000 units and sold 3,000 units at a price of $15.00 a unit.

1. What is the amount of gross margin for the first year?
A. $15,000
B. $24,000
C. $20,000
D. $45,000

Answer 1

A. $15,000

Step-by-step explanation:

Gross margin is the revenue from sales deducted by the production cost of goods sold.

The total cost to produce all 5,000 units is:

`C_(5,000) = 14,000+19,000+$17,000\\C_(5,000) = 50,000`

The production cost of the 3,000 units sold is:

`C_(3,000)=C_(5,000)*(3,000)/(5,000)=50,000*(3,000)/(5,000) \\C_(3,000)=30,000`

If each of the 3,000 units sells for $15.00, the gross margin for the first year is:

`GM = (15.00*3,000) - 30,000\\GM= 15,000`

The correct alternative is A. $15,000

*Note that general, selling, and administrative expenses were not included since they don't qualify as production costs.