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)	$	567,000
Manufacturing costs:
Direct materials cost per unit	$	15
Direct labor cost per unit	$	6
Variable manufacturing overhead cost per unit	$	3
Fixed manufacturing overhead cost (per month)	$	656,000

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
Direct materials cost	15
Direct labor cost	6
Variable manufacturing overhead	3
Fixed manufacturing overhead	16		=656000/41000
Unit product cost	40
1b
Absorption Costing Income Statement
Sales	2772000		=36000*77
Cost of goods sold	1440000		=36000*40
Gross profit	1332000
Selling and administrative expenses	675000		=567000+(36000*3)
Net operating income	657000
2a
Direct materials cost	15
Direct labor cost	6
Variable manufacturing overhead	3
Unit product cost	24
2b
Variable Costing Income Statement
Sales		2772000	=36000*77
Variable expenses:
Variable cost of goods sold	864000		=36000*24
Variable selling and administrative expenses	108000		=36000*3
		972000
Contribution margin		1800000
Fixed expenses:
Fixed manufacturing overhead	656000
Fixed selling and administrative expenses	567000
		1223000
Net operating income		577000