"This makes no sense at all' said Michael, managing director of NI Lid. 'We sold the same number of units this year as we did last, yet our operating profits have more than doubled Who made the goof, the computer or the people who operate it?'. The statements that bewildered Michael are shown below, following to an absorption costing aggregation: Year 1 Year 2 E E Sales (20,000 units each 700,000 700,000 year) Less cost of goods sold 460,000 400,000 Gross margin 240,000 300,000 Less selling and 200,000 200,000 administrative expenses Operating profit 40,000 100,000 The statements above show the results of the first two years of operation. In the first year, NI Ltd produced and sold 20,000 units; in the second year, it again sold 20,000 units, but it increased production in order to have a stock of units at hand, as shown below: Year 1 Year 2 Production in units 20,000 25,000 Sales in units 20,000 20,000 Variable production cost per E8 E8 unit Fixed manufacturing $300,000 $300,000 overhead costs (total) NI Ltd produces a single product; fixed manufacturing overhead costs are applied to the product on the basis of each year's production. Variable selling and administrative expenses are f1 per unit sold