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	$	23
Direct labor	$	15
Variable manufacturing overhead	$	6
Variable selling and administrative	$	1
Fixed costs per year:
Fixed manufacturing overhead	$	240,000
Fixed selling and administrative expenses	$	180,000

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 $52 per unit.

Required:

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

Answer

1.

Breakeven Point (In Units) = Fixed Expenses / Contribution Margin per unit

Selling price	52
Less: Variable Expenses
Direct Material	23
Direct Labor	15
Variable Manufacturing Overhead	6
Variable Selling overhead	1
Contribution Margin per unit

Breakeven point = (240,000 + 180,000) / 7 per unit

Breakeven point = 60,000 Units

2.

Unit (Variable Costing)
Direct Material	23
Direct Labor	15
Variable Manufacturing Overhead	6
Per unit Cost	44

Income Statement (Variable Costing)
	Year 1		Year 2		Year 3
	Detail	Net	Detail	Net	Detail	Net
Sales (@ 52 per unit)		3,120,000		2,600,000		3,380,000
Less: Cost of Goods Sold
Opening Inventory	-				1,100,000
Add: Cost of goods Manufactured	2,640,000		3,300,000		1,760,000
Less: Closing Inventory	-	2,640,000	(1,100,000)	2,200,000	-	2,860,000
Gross Contribution Margin		480,000		400,000		520,000
Less: Variable Selling and Adm. Expenses		60,000		50,000		65,000
Contribution Margin		420,000		350,000		455,000
Less: Fixed Cost
Fixed Manufacturing Cost	240,000		240,000		240,000
Fixed Selling and Adm. Expenses	180,000	420,000	180,000	420,000	180,000	420,000
Net Operating Income		-		(70,000)		35,000

3.

Unit Cost(Absorption Costing)
	Year 1	Year 2	Year 3
Direct Material	23	23	23
Direct Labor	15	15	15
Variable Manufacturing Overhead	6	6	6
Fixed Manufacturing per unit	4.0	3.2	6.0
Per unit Cost	48.0	47.2	50.0

Income Statement
	Year 1		Year 2		Year 3
	Detail	Net	Detail	Net	Detail	Net
Sales		3,120,000		2,600,000		3,380,000
Less: Cost of Goods Sold
Opening Inventory	-		-		1,180,000
Add: Cost of goods Manufactured	2,880,000		3,540,000		2,000,000
Less: Closing Inventory		2,880,000	(1,180,000)	2,360,000		3,180,000
Gross Profit		240,000		240,000		200,000
Less: Selling and Administrative Cost
Variable Selling and Adm. Expenses	60,000		50,000		65,000
Fixed Selling and Adm. Expenses	180,000	240,000	180,000	230,000	180,000	245,000
Net Operating Income		-		10,000		(45,000)