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		47,000
Units sold		42,000
Selling price per unit	$	76
Selling and administrative expenses:
Variable per unit	$	2
Fixed (per month)	$	564,000
Manufacturing costs:
Direct materials cost per unit	$	17
Direct labor cost per unit	$	8
Variable manufacturing overhead cost per unit	$	3
Fixed manufacturing overhead cost (per month)	$	705,000

Management is anxious to assess the profitability of the new camp cot during the month of 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.

Computation of Unit Product Cost
	Absorption Costing
Direct Meterial	$                         17.00
Direct Labour	$                            8.00
Variable Manufactoring Overhead	$                            3.00
Fixed Manufactoring Overhead ($705,000/47,000)	$                         15.00
Unit Product Cost	$                         43.00

1b.

Income Statement
Absorption Costing
Sales (42,000*$76)		$ 3,192,000
Less: Cost of Goods Sold (42,000*$43)		$ 1,806,000
Gross Margin		$ 1,386,000
Less: Selling and administrative expense
Variable (42,000*$2)	$    84,000
Fixed	$ 564,000
Total selling and administrative expense		$     648,000
Net income		$     738,000

2a.

Computation of Unit Product Cost
	Variable Costing
Direct Meterial	$                   17.00
Direct Labour	$                      8.00
Variable Manufactoring Overhead	$                      3.00
Unit Product Cost	$                   28.00

2b.

Income Statement
Variable Costing
Sales (42,000*$76)		$ 3,192,000
Less: Variable Expenses:
Variable manufacturing Cost (($17+$8+$3)*42,000)	$ 1,176,000
Variable selling and administrative expense (42,000*$2)	$        84,000
Total Variable Expenses		$ 1,260,000
Contribution Margin		$ 1,932,000
Fixed Expenses:
Fixed manufacturing overhead	$     705,000
Fixed selling and administrative	$     564,000
Total Fixed Expenses		$ 1,269,000
Net Operating Income		$     663,000