Question

Crystal Corporation produces a single product. The company's variable costing income statement for the month of May appears below:

Crystal Corporation Income Statement For the month ended May 31
Sales ($23 per unit)	$3,680,000
Variable expenses:
Variable cost of goods sold	2,400,000
Variable selling expense	480,000
Total variable expenses	2,880,000
Contribution margin	800,000
Fixed expenses:
Fixed manufacturing overhead	480,000
Fixed selling and administrative	160,000
Total fixed expenses	640,000
Net operating income	$160,000

The company produced 120,000 units in May and the beginning inventory consisted of 80,000 units. Variable production costs per unit and total fixed costs have remained constant over the past several months.

Under absorption costing, for May the company would report a:

A) $160,000 profit

B) $0 profit

C) $320,000 profit

D) $160,000 loss

Answer 1

Units sold = 3680000/23 = 160000

Closing Inventory (Units) = opening Inventory + Production Units - Sales unit

= 80000 + 120000 - 160000 = 40000 units

Variable cost pu = 2400000/160000 = 15

Fixed cost pu= 480000/120000= 4

Manufacturing O/H deferred in (released from) inventory = Fixed mfr O/H in ending inventory - Fixed mfr O/H in beginning inventory

=4 (40000 - 80000) = -160000

Current Profit + deferred Mfr O/H

160000 + (-160000) = 0 Profit

Option B is correct