Swola Company Reports the Following Annual Cost Data for Its

question 99

Multiple Choice

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

The amount of money a company has earned during a specific period, after all deductions are made.

Ordinary Repairs

Expenses for routine maintenance and repairs that maintain the efficient operation of an asset but do not materially extend its life or increase its value.

Hydraulic Lift

A system that uses a fluid-driven mechanism to lift or move objects, often utilized in various machinery and equipment.

Appraised Value

The estimated monetary value of an asset determined by a qualified appraiser based on its condition and market trends.