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Last month a manufacturing company’s profit was $2,000, calculated using absorption costing principles. If marginal costing principles had been used, a loss of $3,000 would have occured. 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)?
10,500
9,500
12,500
7,500can you please show me how to solve this question mr moffat? im not able to understand it
As I explain in my free lectures, the only difference ever between the marginal profit and the absorption profit is the change in inventory multiplied by the fixed production cost per unit.
Here, the difference in profits is $5,000. Therefore the change in inventory is 5,000/2 = 2,500 units.
The absorption profit is higher than the marginal profit, and therefore the inventory must have increased by 2,500 units over the period.Therefore the production must have been 10,000 + 2,500 = 12,500 units.
Have you watched my free lectures on marginal and absorption costing? The lectures are a complete free course for Paper MA and cover everything needed to be able to pass the exam well.
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