Final answer:
Using absorption costing, Barnes company's gross profit when it produces and sells 4,000 units is $116,000 (scenario a). If it produces 5,000 units but sells only 4,000, the gross profit increases to $132,000 (scenario b), due to a reduced fixed cost per unit with the higher production volume.
Step-by-step explanation:
To compute the gross profit using absorption costing for Barnes company, we will be considering two scenarios:
- Producing and selling 4,000 units.
- Producing 5,000 units and selling 4,000 units.
Firstly, we will calculate the cost per unit for production:
- Direct materials: $35
- Direct labor: $25
- Variable overhead: $11
- Fixed overhead per unit (when producing 4,000 units): $80,000 / 4,000 = $20
- Total cost per unit (when producing 4,000 units): $35 + $25 + $11 + $20 = $91
Next, we calculate the total costs and gross profit:
- Total production cost (producing and selling 4,000 units): 4,000 units * $91 = $364,000
- Sales revenue (4,000 units at $120 each): 4,000 * $120 = $480,000
- Gross profit (scenario a): $480,000 - $364,000 = $116,000
For the second scenario (b), where the company produces 5,000 units but sells only 4,000:
- Fixed overhead per unit (when producing 5,000 units): $80,000 / 5,000 = $16
- Total cost per unit (producing 5,000 units): $35 + $25 + $11 + $16 = $87
- Total production cost (producing 5,000 but selling 4,000 units): 4,000 units * $87 = $348,000
- Sales revenue (4,000 units at $120 each): 4,000 * $120 = $480,000
- Gross profit (scenario b): $480,000 - $348,000 = $132,000