Swola Company Reports the Following Annual Cost Data for Its

question 137

Multiple Choice

Swola Company reports the following annual cost data for its single product.
$\begin{array}{ll}\text { Normal production level } & 75,000 \text { units } \\\text { Direct materials } & \$ 1.25 \text { per unit } \\\text { Direct labor } & \$ 2.50 \text { per unit } \\\text { Variable overhead } & \$ 3.75 \text { per unit } \\\text { Fixed overhead } & \$ 300,000 \text { in total }\end{array}$

This product is normally sold for $25 per unit.If Swola increases its production to 200,000 units,while sales remain at the current 75,000 unit level,by how much would the company's gross margin increase or decrease under absorption costing?

• A) $187,500 increase.
• B) $112,500 increase.
• C) There will be no change in gross margin.
• D) $112,500 decrease.
• E) $187,500 decrease.

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Definitions:

Foreign Currency

Monetary units issued by countries other than the home country of a business or investor, involved in international transactions.

Right to Sell

The legal permission or authority given to a person or entity to sell a product or service.

Currency Swap

A financial derivative product that allows two parties to exchange principal and interest in different currencies, used to hedge currency risk or obtain financing in foreign currency.

Forward Contract Payable

A financial instrument obligating the buyer to purchase an asset or the seller to sell an asset at a predetermined future date and price.