Question

Chuck Wagon Grills, Inc., makes a single product—a handmade specialty barbecue grill that it sells for $300. Data for last year’s operations follow:

  

Units in beginning inventory		0
Units produced		10,100
Units sold		8,400
Units in ending inventory		1,700
Variable costs per unit:
Direct materials	$	80
Direct labor		20
Variable manufacturing overhead		10
Variable selling and administrative		30
Total variable cost per unit	$	140
Fixed costs:
Fixed manufacturing overhead	$	180,000
Fixed selling and administrative		1,180,000
Total fixed costs	$	1,360,000

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.

Direct material	$    80
Direct labor	$    20
Variable manufacturing overhead	$    10
Product cost under variable costing	$ 110

2.

Chuck Wagon Grills, Inc.
Variable costing income statement
Sales (8,400*$300)		$ 2,520,000
Less: Variable expenses
Direct material (8,400*$80)	$     672,000
Direct labor (8,400*$20)	$     168,000
Variable manufacturing overhead (8,400*$10)	$        84,000
Variable selling and administrative expenses (8,400*$30)	$     252,000	$ 1,176,000
Contribution margin		$ 1,344,000
Less: Fixed expenses
Fixed manufacturing overhead	$     180,000
Fixed selling and administrative expenses	$ 1,180,000
Total fixed expenses		$ 1,360,000
Net income (loss)		$     (16,000)

3.

Break even point in units = Fixed expenses / Contribution margin

Break even point in units = $1,360,000 / ($300-$140)

Break even point in units = 8,500 units

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