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		46,000
Units sold		41,000
Selling price per unit	$	80
Selling and administrative expenses:
Variable per unit	$	3
Fixed (per month)	$	564,000
Manufacturing costs:
Direct materials cost per unit	$	18
Direct labor cost per unit	$	7
Variable manufacturing overhead cost per unit	$	1
Fixed manufacturing overhead cost (per month)	$	736,000

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. Calculate the unit product cost.

b. Prepare an income statement for May.

2. Assume that the company uses variable costing.

a. Calculate the unit product cost.

b. Prepare a contribution format income statement for May.

Answer 1

ANSWER:-

1. Assume that the company uses absorption costing.

a) Calculate the unit product cost.

Direct materials	18
direct labor	7
variable manufacturing overhead	1
Fixed manufacturing overhead (736,000/46,000)	16
unit product cost	42

b) Prepare an income statement for May.

sales [41,000*80]		3,280,000
Less:-cost of goods sold [41,000*42]		1,722,000
Gross profit		1,558,000
Less:-selling & administrative expense
variable selling&adm expense [41,000*3]	123,000
fixed selling & adm expense	564,000	687,000
Net income		871,000

2. Assume that the company uses variable costing.

a. Calculate the unit product cost.

Direct materials	18
direct labor	7
variable manufacturing overhead	1
Unit product cost	26

b. Prepare a contribution format income statement for May.

	Sales [41,000*80]		3,280,000
	Less: variable costs:
	Cost of goods sold [41,000*26]	1,066,000
	Selling and administration expense [41,000*3]	123,000	1,189,000
	Contribtution margin		2,091,000
	Less:-`Fixed costs
	Fixed manufacturing overheads	736,000
	Fixed selling & administration expense	564,000	1,300,000
	Net income		791,000