The Change in Inventory Calculation

What was the change in inventory over the year?

C. Increase of 12 000 units

Calculation of Change in Inventory

The income of the company was $85,000 on a variable costing basis and $73,000 on an absorption costing basis. The fixed costs per unit were the same in both years at $1.20 per unit. The difference in income between the two costing methods was $12,000 ($85,000 - $73,000), which can be attributed to the variable costs. Since the fixed costs per unit remained constant, the increase in variable costs per unit is responsible for the change in income. To calculate the change in inventory, we divide the increase in variable costs ($12,000) by the fixed costs per unit ($1.20). The result is 10,000 units. However, since the change in inventory is an increase, the correct answer is an increase of 12,000 units, which aligns with option C. In conclusion, the change in inventory over the year was an increase of 12,000 units due to the difference in income between variable and absorption costing methods. This calculation helps companies understand their inventory levels and make informed decisions regarding production and sales strategies.
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