Question

HairNeat Inc. manufactures hair brushes that sell at wholesale for $2.60 per unit. Budgeted production in both 2016 and 2017 was 3,000 units. There was no beginning inventory in 2016. The following data summarized the 2016 and 2017 operations:

	2016	2017
Units sold	2,500	3,200
Units produced	3,000	3,000
Costs:
Variable manufacturing costs per unit	$0.65	$0.65
Fixed factory overhead	$1,290	$1,290
Variable marketing per unit	$0.80	$0.80
Fixed Selling and Administrative	$650	$650

Absorption costing operating income for 2017 is calculated to be:

	1) $850
	2) $1,150
	3) $1,295
	4) $1,654

Answer 1

Income statement (Absorption Costing)		2017
Sales		8320
Less: Cost of goods sold		3456
Opening	540
Add: Units Manuf.	3240
Less: Closing Inventory	324
Gross Margin		4864
Less: Variable Selling & Admin		2560
Less: Fixed Selling & Admin		650
Operating Income		1654

Working Note :

	2016	2017
Units Produced	3000	3000
Units Sold	2500	3200
Cost per Unit under Variable costing	0.65	0.65
Cost per Unit under Absorption costing	1.08	1.08
(Variable cost + Fixed prod cost/Units producted)
Ending Inventory using Absorption costing	540	324
(Closing Inventory*Cost per unit under absorption costing)
Calculation of closing inventory:
Opening	0	500
Add) Produced	3000	3000
Less) sold	2500	3200
Closing	500	300