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		10,000
Units sold		8,000
Selling price per unit	$	75
Selling and administrative expenses:
Variable per unit	$	6
Fixed (per month)	$	200,000
Manufacturing costs:
Direct materials cost per unit	$	20
Direct labor cost per unit	$	8
Variable manufacturing overhead cost per unit	$	2
Fixed manufacturing overhead cost (per month)	$	100,000

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. Absorption costing

a.

Direct materials	20
Direct labor	8
Variable manufacturing overhead	2
Fixed manufacturing overhead ($100000/10000)	10
Unit product cost $	40

b.

High Country, Inc.
Absorption Costing Income Statement
For the Month Ended May
Sales revenue (8000 x $75)	600000
Cost of goods sold (8000 x $40)	320000
Gross profit	280000
Selling and administrative expenses [(8000 x $6)+$200000]	248000
Net operating income $	32000

2. Variable costing

a.

Direct materials	20
Direct labor	8
Variable manufacturing overhead	2
Unit product cost $	30

b.

High Country, Inc.
Variable Costing Income Statement
For the Month Ended May
Sales revenue (8000 x $75)		600000
Less: Variable costs
Cost of goods sold (8000 x $30)	240000
Selling and administrative expenses (8000 x $6)	48000	288000
Contribution margin		312000
Less: Fixed costs
Manufacturing overhead	100000
Selling and administrative expenses	200000	300000
Net operating income $		12000