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	$	85
Selling and administrative expenses:
Variable per unit	$	2
Fixed (per month)	$	563,000
Manufacturing costs:
Direct materials cost per unit	$	17
Direct labor cost per unit	$	7
Variable manufacturing overhead cost per unit	$	2
Fixed manufacturing overhead cost (per month)	$	820,000

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

Answer- 1-a)-Unit product cost under Absorption costing:-Direct materials + Direct Labor+ Variable manufacturing overhead + fixed manufacturing overhead

=$17+$7+$2+$20 = $46 per unit

Explanation:- Unit fixed manufacturing overhead= fixed manufacturing overhead/No. of units produced

=$820000/41000 units =$20 per unit

b)-

HIGH COUNTRY INC.
Income statement (Using absorption costing approach)
Particulars			Amount
			$
Sales (a)	36000 units*$85 per unit		3060000
Less:- Variable cost of goods sold (b)
Opening inventory
Add:- Variable cost of goods manufactured		1066000
Direct materials	41000 units*$17 per unit	697000
Direct labor	41000 units*$7 per unit	287000
Variable manufacturing overhead	41000 units*$ 2 per unit	82000
Fixed manufacturing overhead		820000
Variable cost of goods available for sale		1886000
Less:- Closing inventory	5000 units*$46 per unit	230000	1656000
Gross contribution margin C= a-b			1404000
Less:-Variable selling & administrative exp.	36000 units*$2 per unit		72000
Contribution margin			1332000
Less:- Fixed costs
Selling & administrative exp.			563000
Net Income			769000

2-a)-Unit product cost under Variable costing:-Direct materials + Direct Labor+ Variable manufacturing overhead

=$17+$7+$2 = $26 per unit

b)-

HIGH COUNTRY INC.
Income statement (Using variable costing approach)
Particulars			Amount
			$
Sales (a)	36000 units*$85 per unit		3060000
Less:- Variable cost of goods sold (b)
Opening inventory		NIL
Add:- Variable cost of goods manufactured		1066000
Direct materials	41000 units*$17 per unit	697000
Direct labor	41000 units*$7 per unit	287000
Variable manufacturing overhead	41000 units*$ 2 per unit	82000
Variable cost of goods available for sale		1066000
Less:- Closing inventory	5000 units*$26 per unit	130000	936000
Gross contribution margin C= a-b			2124000
Less:-Variable selling & administrative exp.	36000 units*$2 per unit		72000
Contribution margin			2052000
Less:- Fixed costs
Manufacturing overhead			820000
Selling & administrative exp.			563000
Net Income			669000