a. Under absorption costing, the cost of goods manufactured includes direct materials, direct labor, and factory overhead costs. Both fixed and variable factory costs are included in the calculation of the cost of goods sold.
Sales: $1,665,000
Production costs: $799,200 (direct materials) + $384,000 (direct labor) + $192,000 (variable factory overhead) + $127,200 (fixed factory overhead) = $1,502,400
Gross profit: Sales - Cost of goods sold = $1,665,000 - $1,502,400 = $162,600
Selling and administrative expenses: $232,900 (variable) + $90,100 (fixed) = $323,000
Operating income: Gross profit - Selling and administrative expenses = $162,600 - $323,000 = -$160,400