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Hi. I’m having difficulty understanding and answering the following question.
Last month a manufacturing company’s profit was $2000, calculated using absorption costing principles. If marginal costing principles had been used, a loss of $3000 would have occurred. The company’s fixed production cost is $2 per unit. Sales last month were 10000 units.
Q-What was last months production? (in units)
I assume that you have watched my free lectures, and therefore you should be clear that the only difference ever between the absorption and marginal profits is equal to the change in inventory multiplied by the fixed overheads per unit.
Here the difference in profits is 5,000 (profit of 2,000 as against a loss of 3,000). The fixed costs are absorbed at $2 per unit.
Therefore the inventory will have increased by 5,000/2 = 2,500 units (and increase in inventory because the absorption profit is higher).Since they sold 10,000 units, they must have produced 12,500 units for the inventory to have increased by 2,500 units.
If you have not watched the free lectures then I do suggest that you do watch them – they are a complete free course for Paper F2 and cover everything needed to be able to pass the exam well.
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