Question

High Country, Inc., produces and sells many recreational products. The company has just opened a new plant to produce a folding camp cot that will be marketed throughout the United States. The following cost and revenue data relate to May, the first month of the plant’s operation:

Beginning inventory		0
Units produced		41,000
Units sold		36,000
Selling price per unit	$	77
Selling and administrative expenses:
Variable per unit	$	3
Fixed (per month)	$	562,000
Manufacturing costs:
Direct materials cost per unit	$	17
Direct labor cost per unit	$	8
Variable manufacturing overhead cost per unit	$	3
Fixed manufacturing overhead cost (per month)	$	779,000

Management is anxious to assess the profitability of the new camp cot during the month of May.

Required:

1. Assume that the company uses absorption costing.

a. Determine the unit product cost.

b. Prepare an income statement for May.

2. Assume that the company uses variable costing.

a. Determine the unit product cost.

b. Prepare a contribution format income statement for May.

Answer 1

1a.

Computation of Unit Product Cost
	Absorption Costing
Direct Meterial	$                                  17
Direct Labour	$                                    8
Variable Manufactoring Overhead	$                                    3
Fixed Manufactoring Overhead ($779,000/41,000)	$                                  19
Unit Product Cost	$                                  47

1b.

High County Inc.
Absorption costing income statement
Sales (36,000*$77)	$ 2,772,000
Less: Cost of goods sold (36,000*$47)	$ 1,692,000
Gross profit	$ 1,080,000
Selling and administrative expenses ($562,000+(36,000*$3)	$     670,000
Net income	$     410,000

2a.

Computation of Unit Product Cost
	Variable Costing
Direct Meterial	$                         17
Direct Labour	$                           8
Variable Manufactoring Overhead	$                           3
Unit Product Cost	$                         28

2b.

High County Inc.
Variable costing income statement
Sales (36,000*$77)		$ 2,772,000
Variable expenses
Direct material (36,000*$17)	$ 612,000
Direct labor (36,000*$8)	$ 288,000
Variable manufacturing overhead (36,000*$3)	$ 108,000
Variable selling and administrative expenses (36,000*$3)	$ 108,000
Total variable expenses		$ 1,116,000
Contribution margin		$ 1,656,000
Fixed expenses
Fixed manufacturing expense	$ 779,000
Fixed sellind and administrative expenses	$ 562,000
Total fixed expenses		$ 1,341,000
Net income		$     315,000

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