Old state Manufacturing classifies all costs directly related to the manufacturing of its product as product costs. These costs are inventoried and later expensed as costs of goods sold when the product is sold. All other expenses, including finished goods warehousing costs of $3,630,000 are classified as period expenses. Higgins had suggested that warehousing costs be included as product costs because they are”definitely related to our product.” The company produced 220,000 units during the period and sold 190,000 .units. As the controller reworked the numbers, she discovered that if she included warehousing costs as productcosts, she could improve operating income by $495,000. She was also sure these new numbers would make Higgins happy.(please anser this i got 386975.00 and it says its wrong why?) by how much will Higgins profit personally if the controller makes the adjustments in requirement 1
Ans: Warehoussing Cost/unit= total warehousing Cost/No of units produced
= $ 3630000/ 220000= $16.50
If this cost is treated as product cost , then $16.50 will be included in value of each unit of closing stock. Thus it will increase value of closing stock and ultimately the profit.
Increase in Profit= Units in CLosing Stock x Warehoussing Cost/unit
= 30000 x 16.50
= $ 495000