Question

A company that produces a single product had a net operating income of $81,000 using variable costing and a net operating income of $106,760 using absorption costing. Total fixed manufacturing overhead was $54,060 and production was 10,600 units. This year was the first year of operations. Between the beginning and the end of the year, the inventory level ___________?

Answer 1

The answer is: Increase 2,558 units.

Step-by-step explanation:

We have:

Manufacturing overhead allocated to one unit = 106,760 / 10,600 = $10.07;

We have:

Operating income using variable costing - Manufacturing overhead released from inventory + Manufacturing overhead deferred in inventory = Operating income using absorption costing.

=> Manufacturing overhead deferred in inventory - Manufacturing overhead released from inventory = Operating income using absorption costing - Operating income using variable costing = $25,760.

=> 10.07 x ( Units in closing inventory − Units in opening inventory) = 25,760

<=> Units in closing inventory − Units in opening inventory = 2,558 units.

Thus, inventory level increase by 2,558 units through out the year.