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		40,000
Units sold		35,000
Selling price per unit	$	76
Selling and administrative expenses:
Variable per unit	$	4
Fixed (per month)	$	567,000
Manufacturing costs:
Direct materials cost per unit	$	15
Direct labor cost per unit	$	8
Variable manufacturing overhead cost per unit	$	1
Fixed manufacturing overhead cost (per month)	$	680,000

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	15
Direct labor cost per unit	8
Variable manufacturing overhead cost per unit	1
Fixed manufacturing overhead cost per unit (680000/40000)	17
Unit product cost	41

b. Prepare an income statement for May.

Sales (35000*76)	2660000
Less: Cost of goods sold (35000*41)	(1435000)
Gross profit	1225000
Less: Selling and administrative expenses (35000*4+567000)	(707000)
Net operating income	518000

2. Assume that the company uses variable costing..

a. Determine the unit product cost.

Direct material per unit	15
Direct labor cost per unit	8
Variable manufacturing overhead cost per unit	1
Unit product cost	24

b. Prepare a contribution format income statement for May..

Sales		2660000
Less: Variable cost of goods sold (35000*24)		(840000)
Gross contribution margin		1820000
Less: Variable selling and administrative exp (35000*4)		(140000)
Net contribution margin		1680000
Less: Fixed cost
Fixed manufacturing overhead	(680000)
Fixed selling and administrative exp	(567000)	(1247000)
Net operating income		433000