This product is normally sold for $56 per unit. If Heather increases its production to 80,000 units while sales remain at the current 60,000 unit level, by how much would the company's gross margin increase or decrease under absorption costing? Assume the company has idle capacity to double current production.
Heather, Incorporated reports the following annual cost data for its single product:
$720,000/60,000 units = $12 FOH per unit at 60,000 unit level
$720,000/80,000 units = $9 FOH per unit at 80,000 unit level
$12 - 9 = $3 less FOH cost in each unit sold
$3 × 60,000 = $180,000 gross margin increase
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