Question

Swisher, Incorporated reports the following annual cost data for its single product: Normal production level 30,000 units Direct materials $ 6.40 per unit Direct labor $ 3.93 per unit Variable overhead $ 5.80 per unit Fixed overhead $ 150,000 in total This product is normally sold for $48 per unit. If Swisher increases its production to 50,000 units, while sales remain at the current 30,000 unit level, by how much would the company's income increase or decrease under absorption costing?

Answer 1

Under absorption costing, Swisher's income would remain unchanged with an increase in production to 50,000 units while sales remain at 30,000 units because the extra produced units go into inventory and the income effect is realized only when this inventory is sold.

Step-by-step explanation:

To analyze how Swisher Incorporated's income would change under absorption costing when production increases but sales remain constant, we need to understand how fixed overhead costs are treated. Under absorption costing, fixed overhead costs are allocated to each unit produced. Thus, if production increases, the fixed overhead cost per unit decreases because the same total fixed cost is spread over more units.

Let's calculate the per unit cost before and after the increase in production.

Before Increase:
Direct materials: $6.40/unit
Direct labor: $3.93/unit
Variable overhead: $5.80/unit
Fixed overhead ($150,000 / 30,000 units): $5.00/unit
Total cost per unit: $6.40 + $3.93 + $5.80 + $5.00 = $21.13/unit

After Increase:
Fixed overhead ($150,000 / 50,000 units): $3.00/unit
Total cost per unit: $6.40 + $3.93 + $5.80 + $3.00 = $19.13/unit

Since the fixed overhead cost per unit has decreased by $2.00/unit after the increase in production, the unit cost to produce an extra 20,000 units (50,000 - 30,000 units) has reduced. However, since the sales remain at 30,000 units, the additional 20,000 units go into inventory. The decreased cost per unit would only affect the net income when the inventory is sold. Therefore, without selling the additional inventory, there would be no immediate change in the company's income under absorption costing as the unsold inventory is carried as an asset on the balance sheet.

Answer 2

Profit decreases by $322,600

Step-by-step explanation:

Normal production level = 30,000 units

Cost of direct material per unit =$6.40 , total cost = $6.40*30,000=$192,000

Cost of direct labor per unit =$3.93 , total cost =$3.93*30,000=$117,900

Variable over head cost per unit=$5.80, total cost =$5.80*30,000=$174000

Fixed overhead total cost = $150,000

Production cost with 30,000 units will be;

$192,000 + $117,900 + $174000 + $150,000 =$633900

Normal selling price of product per unit = $48

Revenue after normal sell of 30,000 units $48 = 30,000*48=$1440000

Profit obtained : $806,100

Increasing the production to 50,000 units you can calculate the projected cost of production

New production level = 50,000 units

Cost of direct material per unit =$6.40 , total cost = $6.40*50,000=$320,000

Cost of direct labor per unit =$3.93 , total cost =$3.93*50,000=$196,500

Variable over head cost per unit=$5.80, total cost =$5.80*50,000=$290,000

Fixed overhead total cost = $150,000

Production cost with 30,000 units will be;

$320,000 + $196,500 + $290,000 + $150,000 =$956,500

Normal selling price of product per unit = $48

Revenue after normal sell of 30,000 units $48 = 30,000*48=$1440000

Profit obtained =$483,500

Decreased in profit = $806100-$483500 =$322,600