Question

Jasper Enterprises had the following cost and production information for April:

Units Produced	20,000
Units Sold	17,000
Unit Sales Price	$200
Manufacturing Cost Per Unit
Direct Material	$50
Direct Labor	$25
Variable Manufacturing Overhead	$10
Fixed Manufacturing Overhead	($400,000/20,000) = $20
Full Manufacturing Cost Per Unit	$105
Non manufacturing Costs
Variable Selling Expenses	$80,000
Fixed General and Administrative Costs	$75,000

How much greater will Jasper Enterprises' profit be under absorption costing than under variable costing?

		$315,000
		$400,000
		$60,000
		$340,000

Answer 1

Hey there,

This method can be solved in 2 ways;

METHOD 1)Whenever the units produced is greater than units sold the profit under absorption costing will be greater than profit under variable costing.Since the question has already mentioned that absoption costing income is greater this is the easiest method to solve:take the differnce between units produced and units sold ie; 20000-17000=3000.Now muultiply the difference with the fixed manufactring cost per unit which is 20,thus 3000*20=60000.

METHOD 2)

PROFIT UNDER VARIABLE COSTING

Sales=17000*200    3400,000

Variable manufacturing cost (material,labor,variable.Manf)85*20000 1700,000

less Ending inventory 85*3000 (255000)

(variable manufacting costs*diffrnce between proction and sales)

variable cost of goods sold (1445000)      

gross profit 1955000  

less variable selling and adminstrative expense (80000)

=contirbution margin    = 1875000

less fixed production cost (400000)

less fixed selling and administrative expenses (75000)

=operating income =1400000

^{PROFIT UNDER ABSORPTION COSTING}

Sales 3400,000

variable manufacturing cost= 85*20000=1700000

fixed manfacturing cost =   20*20000=400000

total manfacturing cost= 2100000

less ending inventory=105(including fixed prodction cost)*3000 (315000)

Absorption cost of goods sold (1785000)

gross profit 1615000

less variable selling and admintrative expense (80000)

less fixed selling and administratve expenses (75000)

operating income    1460000

Thus difference between variable costing=1400000 and absorption costing=1460000=60000.