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		$26
Direct labor		$18
Variable manufacturing overhead		$6
Variable selling and administrative		$3
Fixed costs per year:
Fixed manufacturing overhead	$	390,000
Fixed selling and administrative expenses	$	150,000

  

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 $62 per unit.

  
Required:

1.	Compute the company’s break-even point in units sold.

     

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. (Round your intermediate and final answers to 2 decimal places.)

         

  

b.	Prepare an income statement for year 1, year 2, and year 3. (Round your intermediate calculations to 2 decimal places.)

         

Answer 1

Ans.1	Break-even point in unit sales   = Fixed cost / Unit contribution margin
		(390000 + 150000) / 9
		60000 units
	*Unit contribution margin = Selling price per unit - total variable cost per unit
		62 - (26 + 18 + 6 + 3)
		9 per unit
Ans.2a	Unit product cost: (under variable costing):
	Direct materials	26
	Direct labor	18
	Variable manufacturing overhead	6
	Total product cost	50
	In Variable costing method the unit product cost will be equal in each year.
		Year 1	Year 2	Year 3
	Unit product cost	50	50	50
Ans.2b
	Variable costing Income statement
	Particulars	Year 1	Year 2	Year 3
	Sales (a)	3720000	3100000	4030000
	Less: Variable cost of goods sold:
	Direct materials	1560000	1950000	1040000
	Direct labor	1080000	1350000	720000
	Variable manufacturing overhead	360000	450000	240000
	Total vairable cost of goods sold (b)	3000000	3750000	2000000
	Gross contribution margin (c = a-b)	720000	-650000	2030000
	Less: Variable selling & administrative expenses (d)	180000	150000	195000
	Contribution margin (e = c-d)	540000	-800000	1835000
	Less: Fixed expenses:
	Manufacturing	390000	390000	390000
	Selling and administrative expenses	150000	150000	150000
	Total fixed expenses (f)	540000	540000	540000
	Net Operating income (e - f)	0	-1340000	1295000
	*Calculations:
	Particulars	Year 1	Year 2	Yeara 3
	Sales	60000*62	50000*62	65000*62
	Less: Variable cost of goods sold:
	Direct materials	60000*26	75000*26	40000*26
	Direct labor	60000*18	75000*18	40000*18
	Variable manufacturing overhead	60000*6	75000*6	40000*6
	Gross contribution margin
	Less: Variable selling & administrative expenses	60000*3	50000*3	65000*3
Ans.3a	Unit product cost: (under absorption costing):
		Year 1	Year 2	Year 3
	Direct materials	26	26	26
	Direct labor	18	18	18
	Variable manufacturing overhead	6	6	6
	Fixed manufacturing cost per unit	6.5	5.2	9.75
	Total unit product cost	56.5	55.2	59.75
	Fixed manufacturing cost per unit = Fixed manufacturing cost / Units produced
		Year 1	Year 2	Year 3
	Fixed manufacturing cost per unit	390000 / 60000	390000 / 75000	390000 / 40000
	Absorption costing Income statement
	Particulars	Year 1	Year 2	Year 3
	Sales (a)	3720000	3100000	4030000
	Less: Cost of goods sold:
	Direct materials	1560000	1950000	1040000
	Direct labor	1080000	1350000	720000
	Variable manufacturing overhead	360000	450000	240000
	Fixed manufacturing overhead	390000	390000	390000
	Total cost of goods sold (b)	3390000	4140000	2390000
	Gross margin (c = a-b)	330000	-1040000	1640000
	Less: Selling & administrative expenses (d)
	Variable	180000	150000	195000
	Fixed	150000	150000	150000
	Total Selling and administrative expenses	330000	300000	345000
	Net Operating income (e - f)	0	-1340000	1295000
	*Calculations:
	Particulars	Year 1	Year 2	Yeara 3
	Sales	60000*62	50000*62	65000*62
	Less: Variable cost of goods sold:
	Direct materials	60000*26	75000*26	40000*26
	Direct labor	60000*18	75000*18	40000*18
	Variable manufacturing overhead	60000*6	75000*6	40000*6
	Fixed manufacturing overhead	60000*6.5	75000*5.2	40000 * 9.75
	Variable selling & administrative expenses	60000*3	50000*3	65000*3