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	$	21
Direct labor	$	13
Variable manufacturing overhead	$	4
Variable selling and administrative	$	2
Fixed costs per year:
Fixed manufacturing overhead	$	330,000
Fixed selling and administrative expenses	$	150,000

During its first year of operations, Haas produced 40,000 units and sold 40,000 units. During its second year of operations, it produced 55,000 units and sold 30,000 units. In its third year, Haas produced 20,000 units and sold 45,000 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 and 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 (Round your intermediate calculations and final answers to 2 decimal places.) and Prepare an income statement for Year 1, Year 2, and Year 3.

Answer 1

Solution 1:

Selling price per unit = $52

Variable cost per unit = Direct material + Direct labor + Variable manufacturing overhead + Variable Selling and administrative

= $21 + $13 + $4 + $2 = $40

Contribution per unit = Selling price per unit - Variable cost per unit = $52 - $40 = $12

Fixed cost for the year = $330,000 + 150,000 = $480,000

Break even point (In unit sales) = Fixed Cost / Contribution per unit = $480,000 / 12 = 40000 units

Solution 2:

As company is using variable costing, therefore unit product cost will be variable manufacturing cost per unit and will remain same for year 1, 2 & 3.

Variable manufacturing cost per unit = Direct material + Direct Labor + Variable manufacturing overhead

= $21 + $13 + $4 = $38 per unit.

Income Statement - Hass Company under Variable Costing
Particulars	Year 1	Year 2	Year 3
Nos of Sold units	40000	30000	45000
Selling price per unit	$52.00	$52.00	$52.00
Sales (Unit Sold * Selling Price) (A)	$2,080,000.00	$1,560,000.00	$2,340,000.00
Variable Cost:
Direct Material	$840,000.00	$630,000.00	$945,000.00
Direct Labor	$520,000.00	$390,000.00	$585,000.00
Variable Manufacturing Overhead	$160,000.00	$120,000.00	$180,000.00
Variable Selling and administrative expense	$80,000.00	$60,000.00	$90,000.00
Total Variable Cost (B)	$1,600,000.00	$1,200,000.00	$1,800,000.00
Contribution ( C )(A - B)	$480,000.00	$360,000.00	$540,000.00
Fixed Cost:
Fixed Manufacturing Overhead	$330,000.00	$330,000.00	$330,000.00
Fixed Selling and administrative expense	$150,000.00	$150,000.00	$150,000.00
Total Fixed Cost (D)	$480,000.00	$480,000.00	$480,000.00
Net Income (C-D)	$0.00	-$120,000.00	$60,000.00

Solution 3:

Computation of unit product cost - Hass Company
Particulars	Year 1	Year 2	Year 3
Nos of unit produced	40000	55000	20000
Direct Material	$840,000.00	$1,155,000.00	$420,000.00
Direct Labor	$520,000.00	$715,000.00	$260,000.00
Variable Manufacturing Overhead	$160,000.00	$220,000.00	$80,000.00
Fixed Manufacturing Overhead	$330,000.00	$330,000.00	$330,000.00
Total Production Cost	$1,850,000.00	$2,420,000.00	$1,090,000.00
Unit Product Cost (Total Production Cost / Nos of unit produced)	$46.25	$44.00	$54.50

Income Statement - Hass Company under Absorption Costing
Particulars	Year 1	Year 2	Year 3
Nos of Sold units	40000	30000	45000
Selling price per unit	$52.00	$52.00	$52.00
Sales (Unit Sold * Selling Price) (A)	$2,080,000.00	$1,560,000.00	$2,340,000.00
Cost of Goods Sold:
Year 1 - 40000*46.25	$1,850,000.00
Year 2 - 30000*44		$1,320,000.00
Year 3 - (25000*44) + (20000*54.50)			$2,190,000.00
Cost of Goods Sold (B)	$1,850,000.00	$1,320,000.00	$2,190,000.00
Gross Profit ( C ) (A - B)	$230,000.00	$240,000.00	$150,000.00
Variable Selling and administrative expense	$80,000.00	$60,000.00	$90,000.00
Fixed Selling and administrative expense	$150,000.00	$150,000.00	$150,000.00
Net Income	$0.00	$30,000.00	-$90,000.00