Question

Chuck Wagon Grills, Inc., makes a single product—a handmade specialty barbecue grill that it sells for $200. Data for last year’s operations follow:

  

Units in beginning inventory		0
Units produced		10,500
Units sold		8,400
Units in ending inventory		2,100
Variable costs per unit:
Direct materials	$	60
Direct labor		40
Variable manufacturing overhead		10
Variable selling and administrative		30
Total variable cost per unit	$	140
Fixed costs:
Fixed manufacturing overhead	$	170,000
Fixed selling and administrative		340,000
Total fixed costs	$	510,000

Required:

1. Assume that the company uses variable costing. Compute the unit product cost for one barbecue grill.

2. Assume that the company uses variable costing. Prepare a contribution format income statement for last year.

3. What is the company’s break-even point in terms of the number of barbecue grills sold?

Answer 1

1).    Unit product cost for one barbecue grill Under Variable Costing

Unit product Cost under variable costing system	Per Unit (in $)
Direct Material	60
Direct Labor	40
Variable Manufacturing Overhead	10
Units Product Cost	110

2). Contribution format income statement Under Variable Costing

Pariculars	Amount ($)	Amount ($)
Sales (8400 units x $200 per Unit) (A)		1680000
Less: Variable Cost
Direct Material (8400 Units x $60 per unit)	504000
Direct Labor (8400 Units x $40 per unit)	336000
Variable Manufacturing Overhead (8400 units x $10)	84000
Variable Selling Overhead (8400 Units x $30)	252000
Total Variable Cost (B)		1176000
Contribution Margin (C) = (A) - (B)		504000
Less: Fixed Cost
Fixed manufacturing overhead	170000
Fixed selling and administrative	340000
Total Fixed cost (D)		510000
Operation Profit (Loss) = (C) -(D)		($6000)

3. Break Even Point

Contribution per Unit = Selling Price per Unit - Variable Cost per Unit
                                      = $200 - ($110 + $30)
                                  = $60

Total Fixed Cost = $510000

Break Even Point (in Units) = Fixed Cost / Contribution per unit
                                               = $510000 / $60
                                               = 8500 Barbecue