Gloom Co budgeted to make and sell 10,000 units of its product in 20X1. The selling price is $10 per unit and the variable cost $4 per unit. Fixed production costs were budgeted at $50,000 for the year. The company uses absorption costing and budgeted an absorption rate of $5 per unit. During 20X1, it became apparent that sales demand would only be 8,000 units. The management, concerned about the apparent effect of the low volume of sales on profits, decided to increase production for the year to 15,000 units.
Actual fixed costs were still expected to be $50,000 in spite of the significant increase in production volume.
Required
Calculate the profit at an actual sales volume of 8,000 units, using the following methods.
(a) Absorption costing
(b) Marginal costing
Explain the difference in profits calculated.