Question

Swola Company reports the following annual cost data for its Single product.

Normal Product Level: 75,000 Units
Direct Materials: $1.25 per units
Direct Labour $2.50 per units
Variable Overhead $3.75 per units
Fixed Overhead $300,000 in total

This product is normally sold for $25 per unit. If Swola increases its production to 200,000 units, while sales remain at the current 75,000 unit level, by how much would the company's gross margin increase or decrease under absorption costing?

a. $112,500 decrease.
b. $187,500 increase.
c. There will be no change in gross margin.
d. $112,500 increase.
e. $187,500 decrease.

Answer 1

Our answer is B $187,500 increase

Step-by-step explanation:

$300,000/75,000 units = $4 FOH per unit at 75,000 unit level

$300,000/200,000 units = $1.50 FOH per unit at 200,000 unit level

$4 - $1.50 = $2.50 less FOH cost in each unit sold

$2.50 x 75,000 = $187,500 gross margin increase