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My apologies I failed to upload my last question correctly so I shall attempt to post it again. It is as follows:
Last month a company’s profit was $2000 calculated using Absorption costing.
If Marginal costing were used instead, a loss of $3000 would have been incurred.
The Co fixed production cost is $2 per unit
Sales last month were 10,000 units.What was last month’s production (Total units produced) ?
I would be grateful if you would kindly help me John. Thank you. Gratefully appreciated.
The difference in profit is always equal to the change in inventory multiplied by the standard fixed production cost per unit.
You know the difference in profit, and you know the fixed cost per unit.
You can therefore calculate the change in inventory.Since you know the sales, when you know the change in inventory you can calculate the production.
Taking what you have stated above:
The difference in profit is always equal to the change in inventory multiplied by the standard fixed production cost per unit.
[Change in Inventory] x FPOHDifference in Profit = AC Profit= $2000 – MC Profit = $3000 = $5000
You know the difference in profit, and you know the fixed cost per unit.
You can therefore calculate the change in inventory.Working backwards, I would assume (and I could easily be wrong as I’ve not come across this before)
Change in Inventory = $5000 / $2 = 2500 units
Since you know the sales, when you know the change in inventory you can calculate the production.
Again I’m uncertain about the following, however:
Where AC Profit > MC Profit then CI > OI. This applies here
I’m uncertain about the production part, so if I do get this part wrong can you please tell me what the correct answer is, and how I should have arrived at it please John.
However, I would assume that:
As production is greater than sales because here CI is greater than OI then:
Sales = 10,000 units + [2500] = 12,500 units = Production
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