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		44,000
Units sold		39,000
Selling price per unit	$	83
Selling and administrative expenses:
Variable per unit	$	3
Fixed (per month)	$	565,000
Manufacturing costs:
Direct materials cost per unit	$	17
Direct labor cost per unit	$	8
Variable manufacturing overhead cost per unit	$	1
Fixed manufacturing overhead cost (per month)	$	748,000

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. Calculate the unit product cost.

b. Prepare an income statement for May.

2. Assume that the company uses variable costing.

a. Calculate the unit product cost.

b. Prepare a contribution format income statement for May.

Answer 1

1. Absorption costing

a.

Direct materials	17
Direct labor	8
Variable manufacturing overhead	1
Fixed manufacturing overhead ($748000/44000)	17
Unit product cost $	43

b.

High Country, Inc.
Absorption Costing Income Statement
For the Month Ended May
Sales (39000 x $83)	3237000
Cost of goods sold (39000 x $43)	1677000
Gross margin	1560000
Selling and administrative expense [(39000 x $3)+$565000]	682000
Net operating income $	878000

2. Variable costing

a.

Direct materials	17
Direct labor	8
Variable manufacturing overhead	1
Unit product cost $	26

b.

High Country, Inc.
Variable Costing Income Statement
For the Month Ended May
Sales (39000 x $83)		3237000
Variable expenses:
Variable cost of goods sold (39000 x $26)	1014000
Variable selling and administrative expense (39000 x $3)	117000	1131000
Contribution margin		2106000
Fixed expenses:
Fixed manufacturing overhead	748000
Fixed selling and administrative expense	565000	1313000
Net operating income $		793000