Question

New Look Company, which has only one product, has provided the following data concerning its most recent month of operations:

Selling price	$95
Units in beginning inventory	0
Units produced	3,800
Units sold	3,600
Units in ending inventory	200
Variable costs per unit:
Direct materials	$22
Direct labour	$11
Variable manufacturing overhead	$2
Variable selling and administrative	$9
Fixed costs:
Fixed manufacturing overhead	$102,600
Fixed selling and administrative	$63,200

What was the total gross margin for the month under the absorption costing approach?

• a $90,000.

• b $95,200.

• c $118,800.

• d $156,400

Answer 1

Answer:
Fixed Manufacturing Overhead per unit = Total Fixed Manufacturing Overhead/ Units produced
Fixed Manufacturing Overhead per unit = $102,600 / 3,800
Fixed Manufacturing Overhead per unit = $27

Cost per unit as per Absorption Costing = Direct Materials + Direct Labor + Variable Manufacturing Overhead + Fixed Manufacturing Overhead
Cost per unit as per Absorption Costing = $22 + $11 + $2 + $27
Cost per unit as per Absorption Costing = $62

Cost of Goods sold = Cost per unit as per Absorption Costing * Units Sold
Cost of Goods sold = $62 * 3,600
Cost of Goods sold = $223,200

Sales Revenue = Unit Selling Price * Units Sold
Sales Revenue = $95 * 3,600
Sales Revenue = $342,000

Gross Margin = Sales Revenue – Cost of Goods sold
Gross Margin = $342,000 - $223,200
Gross Margin = $118,800

Option c is correct.