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 $ 25 Direct labor $ 12 Variable manufacturing overhead $ 4 Variable selling and administrative $ 2 Fixed costs per year: Fixed manufacturing overhead $ 480,000 Fixed selling and administrative expenses $ 360,000 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 $57 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)
	Selling price per unit			$        57.00
Less:	Variable Costs
	Direct Materials		$   25.00
	Direct Labor		$   12.00
	Variable Manu. OH		$      4.00
	Variabe S&A OH		$      2.00
	Total Variable Costs			$        43.00
	Contribution Margin			$        14.00
	Break even unit sales		=	Fixed Costs / Cont. Margin per unit
			=	($ 480000 + $ 360000) / $ 10
			=	60000	units

2)

a)	Computation of Unit product cost
	Particulars			Year 1	Year 2	Year 3
	Direct Materials			$   25.00	$   25.00	$   25.00
	Direct Labor			$   12.00	$   12.00	$   12.00
	Variable Manu. OH			$      4.00	$      4.00	$      4.00
				$   41.00	$   41.00	$   41.00

b)	Variable Costing Income Statement
	Particulars			Year 1	Workings	Year 2	Workings	Year 3	Workings
	Sales			$ 3,420,000.00	(60000 x $ 57)	$ 2,850,000.00	(50000 x $ 57)	$ 3,705,000.00	(65000 x $ 57)
Less:	Variable Costs
	Direct Materials			$ 1,500,000.00	(60000 x $ 25)	$ 1,250,000.00	(50000 x $ 25)	$ 1,625,000.00	(65000 x $ 25)
	Direct Labor			$    720,000.00	(60000 x $ 12)	$    600,000.00	(50000 x $ 12)	$    780,000.00	(65000 x $ 12)
	Variable Manu. OH			$    240,000.00	(60000 x $ 4)	$    200,000.00	(50000 x $ 4)	$    260,000.00	(65000 x $ 4)
	Variable S&A OH			$    120,000.00	(60000 x $ 2)	$    100,000.00	(50000 x $ 2)	$    130,000.00	(65000 x $ 2)
	Total Variable Costs			$ 2,580,000.00		$ 2,150,000.00		$ 2,795,000.00
	Contribution Margin			$    840,000.00		$    700,000.00		$    910,000.00
Less:	Fixed Costs
	Fixed Manu. OH			$    480,000.00		$    480,000.00		$    480,000.00
	Fixed S&A OH			$    360,000.00		$    360,000.00		$    360,000.00
	Total Fixed Costs			$    840,000.00		$    840,000.00		$    840,000.00
	Operating Income			$                     -		$   (140,000.00)		$      70,000.00

3)

a)	Computation of Unit product cost
	Particulars			Year 1	Workings	Year 2	Workings	Year 3	Workings
	Direct Materials			$   25.00		$   25.00		$   25.00
	Direct Labor			$   12.00		$   12.00		$   12.00
	Variable Manu. OH			$      4.00		$      4.00		$      4.00
	Fixed Manu. OH			$      8.00	($ 480000 / 60000)	$      6.40	($ 480000 / 75000)	$   12.00	($ 480000 / 40000)
				$   49.00		$   47.40		$   53.00

b)	Absorbtion Costing Income Statement
	Particulars			Year 1	Workings	Year 2	Workings	Year 3	Workings
	Sales			$ 3,420,000.00	(60000 x $ 57)	$ 2,850,000.00	(50000 x $ 57)	$ 3,705,000.00	(65000 x $ 57)
Less:	Cost of Goods sold			$ 2,940,000.00	(60000 x $ 49)	$ 2,370,000.00	(50000 x $ 64.6)	$ 3,305,000.00	(W.N.1)
	Gross Margin			$    480,000.00		$    480,000.00		$    400,000.00
Less:	Selling and Adm. Expenses			$    480,000.00		$    460,000.00		$    490,000.00
	Operating Income			$                     -		$      20,000.00		$     (90,000.00)

W.N.1
Cost of Goods sold		=	(25000 units x $ 47.4) + (40000 x $ 53)
		=	$ 3,305,000.00

Is this okay?