Question

During its first year of operations, Silverman Company paid $14,000 for direct materials and $19,000 for production workers' wages. Lease payments and utilities on the production facilities amounted to $17,000 while general, selling, and administrative expenses totaled $8,000. The company produced 5,000 units and sold 3,000 units at a price of $15.00 a unit.
1. What is the amount of gross margin for the first year?
A. $15,000
B. $24,000
C. $20,000
D. $45,000

Answer 1

Answer:

A. $15,000

Explanation:

Gross margin is the revenue from sales deducted by the production cost of goods sold.

The total cost to produce all 5,000 units is:

$C_{5,000} = 14,000+19,000+ 17,000\\C_{5,000} = 50,000$

The production cost of the 3,000 units sold is:

$C_{3,000}=C_{5,000}*\frac{3,000}{5,000}=50,000*\frac{3,000}{5,000} \\C_{3,000}=30,000$

If each of the 3,000 units sells for $15.00, the gross margin for the first year is:

$GM = (15.00*3,000) - 30,000\\GM= 15,000$

The correct alternative is A. $15,000

*Note that general, selling, and administrative expenses were not included since they don't qualify as production costs.