Question

Borques Company produces and sells wooden pallets that are used for moving and stacking materials. The operating costs for the past year were as follows:

Variable costs per unit:
Direct materials $2.85
Direct labor $1.92
Variable overhead $1.60
Variable selling $0.90
Fixed costs per year:
Fixed overhead $180,000
Selling and administrative $96,000

During the year, Borques produced 200,000 wooden pallets and sold 204,300 at $9 each. Borques had 8,200 pallets in beginning finished goods inventory; costs have not changed from last year to this year. An actual costing system is used for product costing.

Required:
a. What is the per-unit inventory cost that is acceptable for reporting on Borques’s balance sheet at the end of the year?
b. How many units are in ending inventory?
c. Calculate absorption-costing operating income.

Answer 1

Borques Company

a. Unit inventory cost = $7.27

b. Ending inventory = 3,900 units

c. Absorption-costing operating income = $73,569

Step-by-step explanation:

a) Data and Calculations:

Variable costs per unit:

Direct materials $2.85

Direct labor $1.92

Variable overhead $1.60 $6.37

Variable selling $0.90 $7.27

Fixed costs per year:

Fixed overhead $180,000

Selling and administrative $96,000 $276,000

Selling price per unit = $9

Acceptable per-unit inventory cost:

Variable product cost per unit = $6.37

Total variable production cost = $1,274,000

Fixed production cost = 180,000

Total production cost = $1,453,000

Unit inventory cost = $7.27 ($1,453,000/200,000)

b. Ending inventory

Beginning inventory 8,200

Production units = 200,000

Units available 208,200

Sales units = 204,300

Ending inventory 3,900

c. Absorption Costing Operating Income:

Sales Revenue $1,838,700 ($9 * 204,300)

Cost of goods sold 1,485,261 ($7.27 * 204,300)

Gross profit $353,439

Selling expenses:

Variable ($0.90 * 204,300) 183,870

Fixed 96,000

Total selling expenses $279,870

Operating income $73,569