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 $ 81 Selling and administrative expenses: Variable per unit $ 3 Fixed (per month) $ 560,000 Manufacturing costs: Direct materials cost per unit $ 17 Direct labor cost per unit $ 8 Variable manufacturing overhead cost per unit $ 2 Fixed manufacturing overhead cost (per month) $ 720,000 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)

Unit Product Cost
Direct material cost per unit	$                17
Direct labor cost per unit	$                  8
Variable manufacturing overhead per unit	$                  2
Fixed manufacturing overhead per unit
($720000/40000 units)	$                18
	$                45

(1b)

Absorption costing Income Statement
Sales (35000 * $81)	$ 2,835,000
Cost of goods Sold (35000 * $45)	$ 1,575,000
Gross margin	$ 1,260,000
Selling & administrative expenses [$560000+(35000 * $3)]	$     665,000
Net operating income	$     595,000

(2a)

Unit Product Cost
Direct material cost per unit	$                17
Direct labor cost per unit	$                  8
Variable manufacturing overhead per unit	$                  2
	$                27

(2b)

Variable costing Income Statement
Sales (35000 * $81)		$ 2,835,000
Variable expenses:
Variable cost of goods sold ($27 * 35000)	$     945,000
Variable selling expense ($3 * 35000)	$     105,000	$ 1,050,000
Contribution margin		$ 1,785,000
Fixed expenses:
Fixed manufacturing overhead	$     720,000
Fixed selling & administrative expenses	$     560,000	$ 1,280,000
Net operating income		$     505,000