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		48,000
Units sold		43,000
Selling price per unit	$	77
Selling and administrative expenses:
Variable per unit	$	4
Fixed (per month)	$	558,000
Manufacturing costs:
Direct materials cost per unit	$	15
Direct labor cost per unit	$	10
Variable manufacturing overhead cost per unit	$	4
Fixed manufacturing overhead cost (per month)	$	864,000

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. Assume that the company uses absorption costing.

a. Determine the unit product cost.

Direct material	15
Direct labor	10
Variable manufacturing overhead	4
Fixed manufacturing overhead (864000/48000)	18
Unit product cost	47

b) Income statement

Sales (43000*77)	3311000
Cost of goods sold (43000*47)	2021000
Gross profit	1290000
Selling and administrative expense (43000*4+558000)	730000
Net operating income	560000

2. Assume that the company uses variable costing.

a. Determine the unit product cost.

Direct material	15
Direct labor	10
Variable manufacturing overhead	4
Unit product cost	29

b) Income statement

Sales (43000*77)		3311000
Variable Cost of goods sold (43000*29)		1247000
Manufacturing margin		2064000
Variable selling and administrative expense (43000*4)		172000
Contribution margin		1892000
Fixed cost
Fixed manufacturing overhead	864000
Fixed Selling and administrative expense	558000	1422000
Net operating income		470000