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Hey John,
Could you explain me the logic in the following question please. let say if we get profit with both methods. Should I do the addition every time to get change in inventory. ThanksQuestion: in recent month a manufacturing company’s profit was $2,000, calculated using absorption costing principles. If marginal costing principles has been used, a loss of $3,000 would have occurred. The company’s fixed production cost is $2 per unit. Sales last month were 10,000 units.
What was last month’s production (in units)?
A 7,500 B 9,500 C 10,500 D 12,500.You should watch the free lectures on this.
The difference between marginal and absorption profits is always the change in inventory multiplied by the fixed overheads per unit.
In this example, the different is $5,000 and therefore the inventory changed by 5000/2 = 2,500 units.
The change in inventory is the different between the sale and the production. You know the sales and therefore you can calculate what the production must have been.
Can you please break this down further for me please. I just don’t get it.Thanks
But there is nothing else to break down!! Have you watched the free lectures on this?
Yes I did, but i don’t know what is the block for me Sir. Can you just set it down so I could see what was subtracted and multiplied to arrive at the answer(workings) . May sound crazy but please help.
The difference in profits between a profit of $2,000 and a loss of $3000, is $5,000.
Therefore the inventory changed by 2,500 units (for the reasons that I explained in my previous reply).
Given that the absorption profit is higher than the marginal profit, the inventory must have increased by 2.500 units.
Since the sold 10,000 units, and the inventory increased by 2,500 units, then they must have produced 12,500 units.
Dear it is very easy, I explain it in this way
2000-(-3000)=$2 × number of units change in inventory
5000=$2 × number of units change in inventory
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