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		40,000
Units sold		35,000
Selling price per unit	$	78
Selling and administrative expenses:
Variable per unit	$	4
Fixed (per month)	$	557,000
Manufacturing costs:
Direct materials cost per unit	$	14
Direct labor cost per unit	$	7
Variable manufacturing overhead cost per unit	$	2
Fixed manufacturing overhead cost (per month)	$	680,000

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

Solution:

1 a. Absorption costing

Unit product cost (14+7+2) + (680,000/40000) = 23+17

$40

1b.Under absorption costing

Income statement for May

Sales (35000x78)	$2,730,000
Cost of goods sold (14+7+2) x 35000=805,000 (680,000 x 35000) / 40,000 =595,000 805000+595000=14,00,000	$1,400,000
Gross profit (2730000-1400000)	$1,330,000
Selling and administraive expenses ( 4 x 35,000)+557,000	$697,000
Net operating Income (1330000-697000)	$633,000

2a. Variable costing

Unit product cost (14+7+2)

$23

2b. Variable costing

Income statement for may

Sales (35000 x 78)	$2,730,000
Variable expenses:
Variable cost of goods sold (14+7+2) x 35000	805,000
Variable selling and administartive expenses (4x35000)	140,000
Contribution margin (2730000-805000-140000)	1,785,000
Fixed expenses:
Fixed manufacturing overhead	680,000
Fixed selling and administrative expenses	557,000
Net operating Income (1785000-680000-557000)	548,000