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		36,000
Units sold		31,000
Selling price per unit	$	77
Selling and administrative expenses:
Variable per unit	$	3
Fixed (per month)	$	561,000
Manufacturing costs:
Direct materials cost per unit	$	16
Direct labor cost per unit	$	9
Variable manufacturing overhead cost per unit	$	1
Fixed manufacturing overhead cost (per month)	$	648,000

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

Facts,

Beginning Rice                   =             0

Units Produced                 =             36000 units

Units Sold                            =             31000 units

Requirement 1(a): Unit Cost under Absorption Costing:

Particulars	Unit Prices ($)
Direct Material	16.00
Direct Labor	9.00
Variable Overhead:
Variable Manufacturing Overhead	1.00
Variable Selling and administration overhead	3.00
Fixed Cost per unit:
Fixed manufacturing Overhead per unit      (648000/36000)	18.00
Fixed selling and administration Overhead per unit     (561000/36000)	15.58
Total Unit cost under Absorption costing	62.58

Requirement 1(b): Income statement under Absorption Costing Method:

Cost of goods manufactured per unit ($)                               =16.00+9.00+1.00+18.00               =$44.00

High Country Inc.

Absorption Costing Income Statement

For the month ending May 31

Particulars	$	$
Sales (31000units *$77.00)		23,87,000.00
Less:     Cost of Goods manufactured(36000units*$44.00)	15,84,000.00
Add: Closing of goods (5000 units*$44.00)	2,20,000.00	(13,64,000.00)
Gross Profit		10,23,000.00
Less: Selling and Administration cost:
Variable Cost (31000*$3.00)	93,000.00
Fixed Cost	5,61,000.00	(6,54,000.00)
Net Operating Income		3,69,000.00

Requirement 2(a): Cost per unit under Variable Costing Method:

Particulars	Unit Prices ($)
Direct Material	16.00
Direct Labor	9.00
Variable Overhead:
Variable Manufacturing Overhead	1.00
Variable Selling and administration overhead	3.00
Total Unit cost under Variable costing	29.00

Requirement 2(b): Income statement under Variable costing Method:

Variable Manufacturing Cost per unit                     =             16+9+1 =26.00

High Country Inc.

Variable Costing Income Statement

For the month ending May 31

Particulars	$	$
Sales (31000units *$77.00)		23,87,000.00
Less:     Variable Cost of Goods manufactured                          (36000units*$26.00)	9,36,000.00
Add: Closing of goods (5000 units*$26.00)	1,30,000.00	(8,06,000.00)
Gross Contribution Margin		15,81,000.00
Less: Variable Selling and Administration cost (31000*$3)		93,000.00
Contribution Margin		14,88,000.00
Less: Fixed Manufacturing cost	6,48,000.00
Less: Fixed Selling and Administration cost	5,61,000.00	(12,09,000.00)
Net Operating Income		2,79,000.00