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	$	24
Direct labor	$	16
Variable manufacturing overhead	$	4
Variable selling and administrative	$	1
Fixed costs per year:
Fixed manufacturing overhead	$	220,000
Fixed selling and administrative expenses	$	140,000

During its first year of operations, Haas produced 40,000 units and sold 40,000 units. During its second year of operations, it produced 55,000 units and sold 30,000 units. In its third year, Haas produced 20,000 units and sold 45,000 units. The selling price of the company’s product is $54 per unit.

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. Break-even point in units = Fixed Cost / Contribution margin per unit
= $360,000 / $9 = 40,000 units
Fixed Cost = Fixed manufacturing overhead + Fixed selling and administrative overhead
= $220,000 + $140,000 = $360,000
Contribution margin per unit = Selling price per unit - Variable cost per unit
Selling price per unit	$54
Less: Variable cost per unit
Direct materials	$24
Direct labor	$16
Variable manufacturing overhead	$4
Variable selling and administrative	$1
Contribution margin per unit	$9
2. Under variable costing, the unit cost is only the variable manufacturing cost per unit and the cost of goods sold is based on the units produced.
Unit cost under variable costing
Direct materials	$24
Direct labor	$16
Variable manufacturing overhead	$4
Unit cost under variable costing	$44
Income statement under variable costing
Particulars	Year 1	Year 2	Year 3
Units sold	40,000	30,000	45,000
Sales revenue (Units sold @ $54 per unit) - A	$2,160,000	$1,620,000	$2,430,000
Units produced	40,000	55,000	20,000
Direct materials (Units produced @ $24 per unit) - B	$960,000	$1,320,000	$480,000
Direct labor (Units produced @ $16 per unit) - C	$640,000	$880,000	$320,000
Variable manufacturing overhead (Units produced @ $4 per unit) - D	$160,000	$220,000	$80,000
Cost of goods sold (B+C+D)	$1,760,000	$2,420,000	$880,000
Variable selling and administrative (Units produced @$1 per unit) - E	$40,000	$55,000	$20,000
Gross margin (A-B-C-D-E)	$360,000	($855,000)	$1,530,000
Less: Fixed manufacturing overhead	$220,000	$220,000	$220,000
Less: Fixed selling and administrative overhead	$140,000	$140,000	$140,000
Net Operating income	$0	($1,215,000)	$1,170,000
3. Under absorption costing, the unit cost includes the variable and the fixed manufacturing cost per unit. Also, the cost of goods sold is based on the units sold.
Unit cost under variable costing
Particulars	Year 1	Year 2	Year 3
Direct materials	$24	$24	$24
Direct labor	$16	$16	$16
Variable manufacturing overhead	$4	$4	$4
Add: Fixed manufacturing cost per unit (Fixed manufacturing cost/units produced)
Year 1 - ($220,000 / 40,000 units)	$5.50
Year 2 - ($220,000 / 55,000 units)		$4
Year 3 - ($220,000 / 20,000 units)			$11
Unit cost under absorption costing	$49.50	$48	$55
Income statement under absorption costing
Particulars	Year 1	Year 2	Year 3
Units sold	40,000	30,000	45,000
Sales revenue (Units sold @ $54 per unit) - A	$2,160,000	$1,620,000	$2,430,000
Direct materials (Units sold @ $24 per unit) - B	$960,000	$720,000	$1,080,000
Direct labor (Units sold @ $16 per unit) - C	$640,000	$480,000	$720,000
Variable manufacturing overhead (Units sold @ $4 per unit) - D	$160,000	$120,000	$180,000
Fixed manufacturing overhead (Units sold @ fixed manufacturing cost per unit computed above) - E	$220,000	$120,000	$495,000
Cost of goods sold (B+C+D+E)	$1,980,000	$1,440,000	$2,475,000
Variable selling and administrative (Units sold @$1 per unit)	$40,000	$30,000	$45,000
Gross Margin	$140,000	$150,000	($90,000)
Less: Fixed selling and administrative overhead	$140,000	$140,000	$140,000
Net Operating income	$0	$10,000	($230,000)