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		36,000
Units sold		31,000
Selling price per unit		$85
Selling and administrative expenses:
Variable per unit		$2
Fixed per month	$	559,000
Manufacturing costs:
Direct materials cost per unit		$16
Direct labor cost per unit		$8
Variable manufacturing overhead cost per unit		$4
Fixed manufacturing overhead cost per month	$	684,000

  

Management is anxious to see how profitable the new camp cot will be and has asked that an income statement be prepared for 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

1a) Unit product cost : Absorption costing

Direct material	16
Direct labour	8
Variable manufacturing overhead	4
Fixed manufacturing overhead (684000/36000)	19
Unit product cost	47

1b) Income Statement

Sales (31000*85)	2635000
Less;Cost of goods sold (31000*47)	1457000
Gross profit	1178000
Less: Selling and administrative expense (31000*2+559000)	621000
Net income (loss)	557000

2a) Unit product cost : Variable costing

Direct material	16
Direct labour	8
Variable manufacturing overhead	4
Unit product cost	28

2b) Income Statement

Sales (31000*85)		2635000
Less;Variable Cost of goods sold (31000*28)		868000
Manufacturing margin		1767000
Less: Variable selling and administrative expense		62000
Contribution margin		1705000
Less: Fixed cost
Fixed manufacturing overhead	684000
Fixed Selling and administrative expense	559000	1243000
Net income (loss)		462000