Question

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

1

Break even point in unit sales = (Fixed cost / contribution per unit)
FIxed cost = ($210000 + $150000) = $360000
Contribution per unit = (Selling price per unit - Variable costs per unit)
=> [$61 - ($28 + $20 + $4 + $3)]
=> $6
So, Break even point in unit sales = ($360000 / $6) = 60000 units (Ans)

2(a)

Particulars	Year 1	Year 2	Year 3
Direct materials	$28	$28	$28
Direct labor	$20	$20	$20
Variable manufacturing overhead	$4	$4	$4
Unit product cost	$52	$52	$52

2(b)

Income statement

Particulars	Year 1	Year 2	Year 3
Sales	$3660000 (60000 units X $61)	$3050000 (50000 units X $61)	$3965000 (65000 units X $61)
Less: Variable expenses
Cost of goods sold	$3120000 (60000 units X $52)	$2600000 (50000 units X $52)	$3380000 (65000 units X $52)
Selling and administrative expenses	$180000 (60000 units X $3)	$150000 (50000 units X $3)	$195000 (65000 units X $3)
Contribution margin	$360000	$300000	$390000
Less: Fixed expenses
Fixed manufacturing overhead	$210000	$210000	$210000
Fixed Selling and administrative expenses	$150000	$150000	$150000
Net operating income	$0	($60000)	$30000

3(a)

Particulars	Year 1	Year 2	Year 3
Direct materials	$28	$28	$28
Direct labor	$20	$20	$20
Variable manufacturing overhead	$4	$4	$4
Fixed manufacturing overhead	3.5 ($210000 / 60000 units)	2.8 ($210000 / 75000 units)	5.25 ($210000 / 40000 units)
Unit product cost	$55.5	$54.8	$57.25

3(b)

Income statement

Particulars	Year 1	Year 2	Year 3
Sales	$3660000 (60000 units X $61)	$3050000 (50000 units X $61)	$3965000 (65000 units X $61)
Less: Cost of goods sold	$3330000 (60000 units X $55.5)	$2740000 (50000 units X $54.8)	$3660000 [(25000 units X $54.8) + (40000 units X $57.25)]
Contribution margin	$330000	$310000	$305000
Less: Selling and administrative expenses	$330000 [$150000 + ($3 X 60000 units)]	$300000 [$150000 + ($3 X 50000 units)]	$345000 [$150000 + ($3 X 65000 units)]
Net operating income	$0	$10000	($40000)

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