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	$	30
Direct labor	$	22
Variable manufacturing overhead	$	6
Variable selling and administrative	$	2
Fixed costs per year:
Fixed manufacturing overhead	$	540,000
Fixed selling and administrative expenses	$	240,000

During its first year of operations, Haas produced 60,000 units and sold 60,000 units. During its second year of operations, it produced 75,000 units and sold 50,000 units. In its third year, Haas produced 40,000 units and sold 65,000 units. The selling price of the company’s product is $73 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.

b. 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.

b. Prepare an income statement for Year 1, Year 2, and Year 3.

Answer 1

1. Contribution Margin per unit = $73-30-22-6-2 = $13 per unit

Break even units = Fixed Costs / Contribution Margin per unit
= ($540000+240000)/13 = 60000 units

2. Variable Costing
a.

	Year 1	Year 2	Year 3
Direct Material	$               30	$                 30	$              30
Direct Labor	$               22	$                 22	$              22
Variable Manufacturing Overhead	$                 6	$                   6	$                 6
Total Unit Product cost	$               58	$                 58	$              58

b.

	Year 1	Year 2	Year 3
Sales	$ 4,380,000	$   3,650,000	$    4,745,000
Cost of Goods Sold
Beginning Inventory	$                -	$                  -	$    1,450,000
Plus Cost of Goods Manufactured	$ 3,480,000	$   4,350,000	$    2,320,000
Less Ending Inventory	$                -	$   1,450,000	$                  -
Cost of Goods Sold	$ 3,480,000	$   2,900,000	$    3,770,000
Variable Selling and administrative	$     120,000	$       100,000	$       130,000
Contribution Margin	$     780,000	$       650,000	$       845,000
Fixed Manufacturing OH	$     540,000	$       540,000	$       540,000
Fixed Selling and administrative	$     240,000	$       240,000	$       240,000
Operating Income	$                -	$     -130,000	$         65,000

3. Absorption Costing
a.

	Year 1	Year 2	Year 3
Direct Material	$         30.00	$           30.00	$           30.00
Direct Labor	$         22.00	$           22.00	$           22.00
Variable Manufacturing Overhead	$            6.00	$             6.00	$             6.00
Fixed Manufacturing Overhead	$            9.00	$             7.20	$           13.50
Total Unit Product cost	$         67.00	$           65.20	$           71.50

b.

	Year 1	Year 2	Year 3
Sales Revenue	$ 4,380,000	$   3,650,000	$    4,745,000
Cost of Goods Sold
Beginning Inventory	$                -	$                  -	$    1,630,000
Plus Cost of Goods Manufactured	$ 4,020,000	$   4,890,000	$    2,860,000
Less Ending Inventory	$                -	$   1,630,000	$                  -
Cost of Goods Sold	$ 4,020,000	$   3,260,000	$    4,490,000
Gross Margin	$     360,000	$       390,000	$       255,000
Variable Selling and administrative	$     120,000	$       100,000	$       130,000
Fixed Selling and administrative	$     240,000	$       240,000	$       240,000
Operating Income	$                -	$         50,000	$     -115,000