Question

Problem 6-18 Variable and Absorption Costing Unit Product Costs and Income Statements [LO6-1, LO6-2]

Haas Company manufactures and sells one product. The following information pertains to each of the company’s first three years of operations:

Variable costs per unit:
Manufacturing:
Direct materials	$	28
Direct labor	$	20
Variable manufacturing overhead	$	4
Variable selling and administrative	$	3
Fixed costs per year:
Fixed manufacturing overhead	$	210,000
Fixed selling and administrative expenses	$	150,000

During its first year of operations, Haas produced 60,000 units and sold 60,000 units. During its second year of operations, it produced 75,000 units and sold 50,000 units. In its third year, Haas produced 40,000 units and sold 65,000 units. The selling price of the company’s product is $61 per unit.

Required:

1. Compute the company’s break-even point in unit sales.

2. Assume the company uses variable costing:

a. Compute the unit product cost for Year 1, Year 2, and Year 3.

b. Prepare an income statement for Year 1, Year 2, and Year 3.

3. Assume the company uses absorption costing:

a. Compute the unit product cost for Year 1, Year 2, and Year 3.

b. Prepare an income statement for Year 1, Year 2, and Year 3.

Answer 1

Solution to part (1):

Break even point in unit sales = Fixed costs / Contribution margin

= $ 360,000 / ($ 61 - $55*)

= 60,000 units

*Total variable costs = $ 28 + $ 20 + $ 4 + $3 = $ 55

Solution to part (2 a)

Under variable costing company only considers the variable manufacturing costs under product costs

SO product costs in all the three years will be:

= Material cost + Labour cost+ variable manufacturing overhead

= $ 28 + $ 20 + $ 4

= $ 52

Solution to part (2 b)

Particular	Year 1	Year 2	Year 3
Sales	$ 3,660,000	$ 3,050,000	$3,965,000
Variable cost
Variable COGS	$ 3,120,000	$2,600,000	$3,380,000
Variable selling and administrative.	$180,000	$150,000	$195,000
Total variable cost	$3,300,000	$2,750,000	$ 3,575,000
Fixed cost
Fixed manufacturing overhead	$210,000	$210,000	$210,000
Fixed selling and administrative.	$150,000	$150,000	$150,000
Total fixed coat	$360,000	$360,000	$360,000
Net Operating Income	0	$(60,000)	$30,000

Solution to part 3a.

Under absorption costing company also considers the fixed manufacturing overhead apart from variable maufacturing overhead.

Formula for product cost is = Variable Manufacturing cost + (Fixed manufacturing overhead / Total units produced)

In 1st year = $ 52 + (210,000 / 60,000)

= $ 55.5

In 2nd year = $ 52 + (210,000 / 75,000)

= $ 54.8

In 3rd year = $ 52 + (210,000 / 40,000)

= $ 57.25

Solution to part 3b.

Particular	Year 1	year 2	year 3
Sales	$ 3,660,000	$ 3,050,000	$3,965,000
COGS	$3,330,000	$2,740,000	$3,721,250
Gross margin	$330,000	$310,000	$243,750
Selling and administrative.	$330,000	$300,000	$345,000
Net Operating Income	0	$ 10,000	$(101,250)

Calculation of selling and administrative expense:

Variable selling and administrative cost x Number of units sold ) + Fixed selling and administrative costs