Question

The level of inventory of a manufactured product has increased by 8,009 units during a period. The following data are also available:

Line item description Variable Fixed
Unit manufacturing costs $11.00 $6.00
Unit operating expenses $4.00 $1.00
The effect on operating income if absorption costing is used rather than variable costing would be:
a. $48,054 decrease
b. $56,063 increase
c. $48,054 increase
d. $56,063 decrease

Answer 1

The increase in operating income when using absorption costing over variable costing is calculated by multiplying the increased inventory units by the fixed cost per unit, which equates to a $48,054 increase in this scenario.

Step-by-step explanation:

The student is asking about the effect on operating income when using absorption costing compared to variable costing. To solve this, we need to consider the additional fixed manufacturing costs that would be allocated to the increased inventory units under absorption costing. Under variable costing, only variable costs are considered in product costs, whereas absorption costing includes both fixed and variable manufacturing costs.

We have an increase of 8,009 units. Fixed manufacturing costs per unit are $6. The increase in operating income under absorption costing would be 8,009 units multiplied by the fixed cost per unit, resulting in an increase of $48,054 (8,009 units × $6/unit). Thus, the correct answer is a $48,054 increase in operating income when using absorption costing over variable costing.