Q-21-8RQ - Horngren'S Financial And Managerial Accounting

Question

Explain how increasing production can increase gross profit when using absorption costing.

Step-by-Step Solution

Answer

Answer

 

Gross profit can be increased by reducing fixed manufacturing overhead per unit.

 

Step 1: Gross profit under absorption costing

Gross profit under absorption costing is calculated by reducing the cost of goods sold from sales revenue. Cost of goods sold consists of both variable and fixed cost.

Step 2: how increasing production can increase gross profit when using absorption costing .

When production increases the fixed manufacturing cost per unit decreases which results in higher gross profit.