Question

7) A company that produces a single product had a net operating income of $65,000 using variable costing and a net operating income of $95,000 using absorption costing. Total fixed manufacturing overhead was $60,000 and production was 10,000 units both this year and last year. Last year was the first year of operations. Between the beginning and the end of the year, the inventory level: A) decreased by 5,000 units B) increased by 5,000 units C) decreased by 30,000 units D) increased by 30,000 units

Answer 1

Answer:

B) increased by 5,000 units

Explanation:

For computing the inventory level, first we have to determine the fixed cost per unit which is shown below:

Fixed cost per unit = Total fixed cost ÷ number of units produced

                                 =$60,000 ÷ 10,000

                                 =$6

Now the inventory level would be

= (Net operating income using absorption costing - Net operating income using  variable costing) ÷ (Fixed cost per unit)

= ($95,000 - $65,000) ÷ $6

= $30,000 ÷ $6

= 5,000 units increased