Donovan Company incurred the following costs while producing 500 units: direct materials $10 per unit, direct labour $25 per unit, variable manufacturing overhead, $15 per unit, total fixed overhead costs, $10,000; variable selling and administrative costs, $5 per unit; total fixed selling and administrative costs, $7,500. There are no beginning inventories.

What is the operating income using absorption costing if 500 units are sold for $100 each?

a. $500

b. $2,500

c. $2,750

d. $5,000

Question

Antoine Martin

Business

14 February, 08:54

Donovan Company incurred the following costs while producing 500 units: direct materials $10 per unit, direct labour $25 per unit, variable manufacturing overhead, $15 per unit, total fixed overhead costs, $10,000; variable selling and administrative costs, $5 per unit; total fixed selling and administrative costs, $7,500. There are no beginning inventories.

What is the operating income using absorption costing if 500 units are sold for $100 each?

a. $500

b. $2,500

c. $2,750

d. $5,000

+2

Answers (1)

Know the Answer?

Yuliana Jackson · Answer 1

Option (D) is correct.

Explanation:

Unit product cost:

= Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead

= $10 + $25 + $15 + $20

= $70

Operating income using absorption costing:

= (500 units * $100) - (500 units * $70) - (500 units * $5) - $7,500

= $50,000 - $35,000 - $2,500 - $7,500

= $5,000