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Greetings.
Sir, why is the opening inventories for both months ignored, wont the opening inventory affect the answer of either absorption or marginal being higher or lower ?
Perhaps more opening inventory would result in more closing inventory remaining thus changing the answer of month two for example, whose sales was higher than production, thus initially leading the answer to have marginal profit being higher, but with the closing inventory of last month shifting to the opening inventory, more of the closing inventory would remain now for Month 2, thus shifting the answer to absorption method profit being higher, instead of marginal.
Also, another methodology I had – was that since opening inventory was 400 for month 1, and closing inventory 100. There was actually a fall in inventory, and thus Marginal profit should have been higher for Month 1.
So I had two methods going on in my mind, if we considered the opening inventory at all. But I see you totally ignored them to reach the answer and just focused on sales and production levels.
Im confused, please elaborate nicely.
Awaiting your assistance.
It is impossible to calculate the actual profits, and the question is not asking you to.
It is asking which of the combinations of profits is consistent (i.e. is possible).In month 1 they produce more than they sell. Therefore the inventory will increase over the month, and therefore the absorption profit will be higher.
In month 2 they produce less that they sell. Therefore the inventory will decrease over the month, and therefore the marginal profit will be higher.Only one of the choices available fits in (i.e. is consistent) with my previous paragraph.
Why is opening inventory units not taken into consideration ? Im not focusing into the figure of the units in order to calculate actual profits.
I already understand the default pattern that you are explaining. My only contention is – why is the opening inventory not taken into consideration alongside the production units, the closing inventory units, and the sales units. I say, won’t the opening inventory units add to the closing inventory units, by adding onto the production units, thus more units remaining after sales ?
Or is it that the production units are initially calculated and already derived after considering the opening and closing units at hand, as we learn in the budgeting chapter ? Therefore, whatever amount the opening units, it has already by subtract from production units to create the production units and the closing inventory units already added to it, to reach the final production unit quantity.
In some questions I read elsewhere – only the opening and closing units are given, and the answer says since the opening inventory units were more and closing less – it means the inventory reduced at the end of the day, and thus marginal profit should be more than the absorption profit.
So Im still confused, please I request you elaborate more, as to why the opening inventory units are ignored.
As I explain in my lectures, the only difference ever between the absorption and marginal profits is the change in the inventory over the period. The difference is the change in the inventory multiplied by the fixed production costs per unit.
It is completely irrelevant what the actual opening inventory was – all that matters is whether the inventory increases or decreases. If they produce more than they sell then the inventory must increase by the difference. If they sell more than they produce then the inventory must decrease by the difference.
Do look at example 3 in Chapter 10 of our free lecture notes (and the lecture working through that example).
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