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		37,000
Units sold		32,000
Selling price per unit	$	81
Selling and administrative expenses:
Variable per unit	$	2
Fixed (per month)	$	555,000
Manufacturing costs:
Direct materials cost per unit	$	14
Direct labor cost per unit	$	9
Variable manufacturing overhead cost per unit	$	2
Fixed manufacturing overhead cost (per month)	$	666,000

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

1. Assume that the company uses absorption costing.

a. Determine the unit product cost.

Direct material per unit	14
Direct labour per unit	9
Variable manufacturing overhead per unit	2
Fixed manufacturing overhead per unit (666000/37000)	18
Total unit product cost	43

b. Prepare an income statement for May.

Sales (32000*81)	2592000
Less: Cost of goods sold (32000*43)	(1376000)
Gross profit	1216000
Less: Selling and administrative exp (32000*2)+555000	(619000)
Net operating income	597000

2. Assume that the company uses variable costing.

a. Determine the unit product cost.

Direct material per unit	14
Direct labour per unit	9
Variable manufacturing overhead per unit	2
Total unit product cost	25

b. Prepare a contribution format income statement for May.

Sales	2592000
Less: Variable cost of goods sold (32000*25)	(800000)
Less: Variable selling and administrative exp	(64000)
Contribution margin	1728000
Less: Fixed manufacturing overhead	(666000)
Less: Fixed selling and administrative exp	(555000)
Net operating income	507000