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		42,000
Units sold		37,000
Selling price per unit	$	80
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	$	3
Fixed manufacturing overhead cost (per month)	$	798,000

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

1a
Direct materials cost	16
Direct labor cost	9
Variable manufacturing overhead	3
Fixed manufacturing overhead	19		=798000/42000
Unit product cost	47
1b
Sales	2960000		=37000*80
Cost of goods sold	1739000		=37000*47
Gross profit	1221000
Selling and administrative expenses	672000		=561000+(37000*3)
Net operating income	549000
2a
Direct materials cost	16
Direct labor cost	9
Variable manufacturing overhead	3
Unit product cost	28
2b
Sales		2960000	=37000*80
Variable expenses:
Variable cost of goods sold	1036000		=37000*28
Variable selling and administrative expenses	111000		=37000*3
		1147000
Contribution margin		1813000
Fixed expenses:
Fixed manufacturing overhead	798000
Fixed selling and administrative expenses	561000
		1359000
Net operating income		454000