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M5 Problems
Module 5 Review Questions

I. Absorption costing and over-production Under absorption costing, a company had the following per unit costs when 10,000 units were produced.

1. Compute the company’s total production cost per unit if 25,000 units had been produced.

Direct Labor $ 2 Direct Material $ 3 Variable overhead $ 4 Total Variable cost $ 9 Fixed overhead ($50,000 / 25,000) $ 2 Total production cost per unit $ 11 2. Why might a manager of a company using absorption costing produce more units than can currently be sold? The manager may choose to produce more units than they can sell because the cost per unit props drastically when you produce more. As long as the product is not perishable and the company has room for storing the amount of product that cannot be sold there shouldn’t be a downside to producing more than can be sold. II. Computing contribution margin AirTel Company sold 10,000 units of its product at a price of $80 per unit. Total variable cost is $50 per unit consisting of $40 in variable production cost and $10 in variable selling and administrative cost. Compute the contribution margin.

Sales (10,000 x $80) $80,000
Variable expenses Variable production cost (10,000 x $40) $40,000 Variable selling & admin (10,000 x $10) $10,000 $50,000
Contribution margin $130,000

III. Computing unit cost under absorption costing Rajeev Company reports the following information regarding its

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