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 44,000 Units sold 39,000 Selling price per unit $ 80 Selling and administrative expenses: Variable per unit $ 2 Fixed (per month) $ 566,000 Manufacturing costs: Direct materials cost per unit $ 15 Direct labor cost per unit $ 9 Variable manufacturing overhead cost per unit $ 3 Fixed manufacturing overhead cost (per month) $ 748,000 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

1) Unit product cost : Absorption Costing

Direct material	15
Direct labor	9
variable manufacturing overhead	3
Fixed manufacturing overhead (748000/44000)	17
Unit product cost	44

Income statement

Sales (39000*80)	3120000
Cost of goods sold (39000*44)	1716000
Gross profit	1404000
Selling and administrative expense (39000*2+566000)	644000
Operating income	760000

2) Unit product cost : variable Costing

Direct material	15
Direct labor	9
variable manufacturing overhead	3
Unit product cost	27

Income statement

Sales (39000*80)		3120000
Variable Cost of goods sold (39000*27)		1053000
Manufacturing margin		2067000
Variable selling and administrative expense		78000
Contribution margin		1989000
Fixed cost
Fixed manufacturing overhead	748000
Fixed Selling and administrative expense	566000
Total Fixed cost		1314000
Operating income		675000