Favaz began business at the start of this year and had the following costs: variable manufacturing cost per unit, $9; fixed manufacturing costs, $60,000; variable selling and administrative costs per unit, $2; and fixed selling and administrative costs, $220,000. The company sells its units for $45 each.
Additional data follow.
Planned production in units 10,000
Actual production in units 10,000
Number of units sold 8,500
There were no variances.

The income (loss) under absorption costing is:

A. None of the answers is correct.
B. $15,000.
C. $(7,500).
D. $18,000.
E. $9,000.

The income (loss) under absorption costing is $7,500, which is mentioned in option C for the Favaz began business.

Explanation:

The given is,

            Variable manufacturing cost per unit - $9

            Fixed manufacturing costs - $60,000

            Variable selling and administrative costs per unit - $2

            Fixed selling and administrative costs - $220,000

            Sells its units for $45 each

            Planned and actual production in units 10,000

            Number of units sold 8,500

Step:1

          Total variable cost = No.of units × Variable cost per unit

                                            = 10,000 × 9

                                            = $90,000

          Total variable selling and administrative cost,

                  = No.of units × Variable selling and administrative cost per unit

                  = 10,000 × 2

                  = $20,000

          Total cost = Total variable cost + Fixed cost +  Total variable selling  

                               and administrative cost + Fixed selling and

                               administrative costs + Fixed manufacturing costs

                             = 90,000 + 20,000 + 220,000 + 60,000

                             = 390,000

          Total cost = $390,000

Step:2

           Total sales cost = No.of units to be sold × Sales cost per unit

                                       = 8,500 × 45

                                       = 382,500

           Total sales cost = $382,500

Step:3

          Profit or Loss = Total sales price - Total cost

                                  = 382,500 - 390,000

                                  = - 7,500 ( Negative indicates Loss )

                        Loss = $7500

Result:

           The income (loss) under absorption costing is $7,500, which is mentioned in option C for the Favaz began business.

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