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 10,000 Units sold 8,300 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 1,020,000 Total fixed costs $ 1,200,000

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) Compute unit Product cost using variable costing

Particular	cost per unit
Direct material	$80
Direct labour	$20
Variable Manufacturing OVERHEAD	$10
unit Product cost	$110

2) Compute income statement using variable costing

Particular	amount ($)	amount ($)
Sales (8300×$300)		2490000
(-) variable cost
Direct material(8300×$80)	664000
Direct labour(8300×$20)	166000
Variable Manufacturing OVERHEAD(8300×$10)	83000
Variable selling overhead(8300×$30)	249000
Total variable cost		(1162000)
CONTRIBUTION margin		1328000
(-) fixed cost
Fixed Manufacturing OVERHEAD	180000
Fixed selling overhead	1020000
Total fixed cost		(1200000)
Operating income		128000

3) Compute break even point in unit's

Break even point in unit's = fixed cost/CONTRIBUTION MARGIN PER UNIT

CONTRIBUTION margin per unit = selling price - variable cost per unit

= $300 - $140=$160

Break even point in unit's = $1200000/$160

= 7500 unit's

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