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:

Net Price Method

An accounting method that records purchases at the net price, after deducting any discounts, rather than recording them at the gross price.

Catalog Price

The listed price of goods or services in a catalog, before any discounts or adjustments.

Perpetual Inventory System

An inventory accounting system that records the sale or purchase of inventory immediately through the use of computerized point-of-sale systems and enterprise asset management software.