Sales (@ $25 per unit)
$1,000,000 $ 1,250,000
Cost of goods sold (@ $18 per unit)
720,000
900,000
Gross margin
280,000
350,000
Selling and administrative expenses*
210,000 230,000
Net operating income
$ 70,000 $ 120,000
*$2 per unit variable; $130,000 fixed each year.
The company's $18 unit product cost is computed as follows:
Direct materials
$4
Direct labor
7
Variable manufacturing overhead
1
Fixed manufacturing overhead ($270,000 \div 45,000 units)
6
Absorption costing unit product cost
$18
Production and cost data for the first two years of operations are:
Year 1 Year 2
Units produced 45,000 45,000
Units sold
40,000 50,000