Atlantic Company produces a single product. For the most recent year, the company's net operating income computed by the absorption costing method was $7,400, and its net operating income computed by the variable costing method was $10,100. The company's unit product cost was $17 under variable costing and $22 under absorption costing. If the ending inventory consisted of 1,460 units, the beginning inventory must have been:

The answer is 2,000 units.

Explanation:

Manufacturing overhead allocated to one unit = Unit cost under absorption costing - Unit cost under variable costing = 22 - 17 = $5;

We have:

Operating income using variable costing - Manufacturing overhead released from inventory + Manufacturing overhead deferred in inventory = Operating income using absorption costing 10,100 - 7,400 = Manufacturing overhead released from inventory - Manufacturing overhead deferred in inventory 2,700 = 5 x (Units in opening inventory - Units in closing inventory) Units in opening inventory - Units in beginning inventory = 540

=> Units in the beginning = 1,460 + 540 = 2,000 units.