Answer (C) is correct . In an absorption costing system, fixed overhead costs are included in inventory. When sales exceed production, more overhead is expensed under absorption costing due to fixed overhead carried over from the prior inventory. If sales increase over production, more than one period’s overhead is recognized as expense. Accordingly, if the increase in overhead expensed is greater than the contribution margin of the increased units sold, profit may be lower with an increased level of sales.
Answer (A) is incorrect because Profit is a function of both sales and production, so it will not always move in the same direction as sales.
Answer (B) is incorrect because Profit is a function of both sales and production, so it will not always move in the same direction as sales.
Answer (D) is incorrect because Decreased output will increase the unit cost of items sold. Fixed overhead per unit will increase.
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