Question

Exercise 19-12 Absorption costing and overproduction LO C1

Jacquie Inc. reports the following annual cost data for its single product.

Normal production and sales level		73,000	units
Sales price	$	57.30	per unit
Direct materials	$	10.30	per unit
Direct labor	$	7.80	per unit
Variable overhead	$	12.30	per unit
Fixed overhead	$	1,160,700	in total

Complete the below table using absorption costing. (Round cost per unit answers to 2 decimal place.)

Production volume Cost of goods sold: 73,000 units 106,000 units Direct materials per unit $10.30 $10.30 Direct labor per unit 7.80 7.80 Variable overhead per unit 12.30 12.30 Fixed overhead per unit 15.90 10.95 Cost of goods sold per unit $46.30 $41.35 Number of units sold Total cost of goods sold Jacquie Inc. Income statement through gross margin Sales volume 73,000 units 73,000 units Sales $4,182,900 $4,182,900 0 0 4,182,900 4,182,900 If Jacquie increases its production to 106,000 units, while sales remain at the current 73,000 unit level, by how much would the company’s gross margin increase or decrease under absorption costing? Assume the company has idle capacity to double current production. Gross margin increases by: Number of units sold Change in fixed overhead cost per unit Change in cost of goods sold: $0

***Please show all parts.

Answer 1

• All working forms part of the answer
• Table 1

Production volume
Cost of goods sold:	73,000 units	106,000 units
Direct materials per unit	$              10.30	$            10.30
Direct labor per unit	$                7.80	$              7.80
Variable overhead per unit	$              12.30	$            12.30
Fixed overhead per unit	$              15.90	$            10.95
Cost of goods sold per unit (A)	$              46.30	$            41.35
Number of units sold (B)	73000	73000
Total cost of goods sold (A x B)	$   33,79,900.00	$ 30,18,550.00

• Table 2

Jacquie Inc.
Income statement through gross margin
	Sales volume
	73,000 units	73,000 units
Sales	$ 41,82,900.00	$      41,82,900.00
(-) Cost of Goods Sold [calculated in Table 1]	$ 33,79,900.00	$      30,18,550.00
Gross Margin	$    8,03,000.00	$      11,64,350.00

• Table 3

If Jacquie increases its production to 106,000 units, while sales remain at the current 73,000 unit level, by how much would the company’s gross margin increase or decrease under absorption costing? Assume the company has idle capacity to double current production.
Gross margin increases by:	$361350	[1164350 – 803000]
Number of units sold	73000
Change in fixed overhead cost per unit	$4.95	[$15.9 - $10.95]
Change in cost of goods sold:	$361,350	[$3379900 – $3018550]