Question

Analyzing Income under Absorption and Variable Costing Variable manufacturing costs are $126 per unit, and fixed manufacturing costs are $157,500. Sales are estimated to be 10,000 units. If an amount is zero, enter "0". a. How much would absorption costing operating income differ between a plan to produce 10,000 units and a plan to produce 15,000 units

Answer 1

Absorption Costing Income will be greater than Variable Costing Income by $52,500

Step-by-step explanation:

Absorption Costing Income differ with Variable Costing Income when Production does not equal to Sales.This is because the fixed overheads are deferred in closing inventory under the Absorption Costing System.

Only when Production equals to Sales then Income under the two methods would be the same.

a plan to produce 10,000 units

Production (10,000 units) = Sales (10,000 units)

therefore Absorption Costing Income equals Variable Costing Income

a plan to produce 15,000 units

Production (15,000 units) > Sales (10,000 units)

therefore Absorption Costing Income does equals Variable Costing Income as fixed cost in Absorption costing are deferred in inventory (5,000) units.

Differnce = 5,000 units × ($157,500/ 15,000)

= 5,000 units × $10.50

= $52,500

Absorption Costing Income will be greater than Variable Costing Income by $52,500