Absorption Costing, Value of Ending Inventory, Operating Income Pattison Product

Question

Absorption Costing, Value of Ending Inventory, Operating Income

Pattison Products, Inc., began operations in October and manufactured 40,000 units during the month with the following unit costs:

* Fixed overhead per unit = $280,000 / 40,000 units produced = $7.

Total fixed factory overhead is $280,000 per month. During October, 38,400 units were sold at a price of $24, and fixed marketing and administrative expenses were $130,500.

Required:

4. What if November production was 40,000 units, costs were stable, and sales were 41,000 units? What is the cost of ending inventory?

$

What is operating income for November?
$

Direct materials $5.00 Direct labor 3.00 Variable overhead 1.50 Fixed overhead* 7.00 Variable marketing cost 1.20

Explanation / Answer

SOLUTION

Units in ending inventory = Units, beginning inventory + Units produced - Units sold

= 1,600 + 40,000 - 41,000 = 600 units

Cost of ending inventory = $16.50 * 600 = $9,900

The new operating income is $127,800, calculated as follows:

Cost of goods sold = $5 + $3 + $1.50 + $7 = $16.50

Amount ($) Sales ($24 * 41,000) 984,000 Less: Cost of goods sold ($16.50 * 41,000) 676,500 Gross profit 307,500 Less: Variable marketing expenses ($1.20 * 41,000) (49,200)   Fixed marketing and administrative expenses (130,500) Operating income 127,800

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