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 $ 26 Direct labor $ 18 Variable manufacturing overhead $ 9 Variable selling and administrative $ 1 Fixed costs per year: Fixed manufacturing overhead $ 540,000 Fixed selling and administrative expenses $ 120,000 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 $65 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

Req 1:
Selling price per unit				65
Less: Variable cost per unit (26+18+9+1)				54
Contribution Margin per unit				11
Total fixed cost (540000+120000):				660000
Break even units: Total Fixed cost / CM perr unit
		660000 /11 = 60000 units
Req 2-a: Variable costing
Compute the Variable costing Unit Product cost
				Year 1	Year 2	Year 3
Direct Material				26	26	26
Direct labour				18	18	18
Variable Manufacturing overheads				9	9	9
Variable costing unit prroduct cost				53	53	53
Construct The Variable Costing Income Statement under FIFO
				YEAR 1		YEAR 2		Year 3
Sales					3,900,000		3,250,000		4,225,000
Less: Variable cost
variable cost of goods sold				3,180,000		2,650,000		3,445,000
Variable selling expense				60,000	3,240,000	50,000	2,700,000	65,000	3,510,000
Contribution margin					660,000		550,000		715,000
Fixed expense:
Fixed Manufacturing overheads					540,000		540,000		540,000
Fixed selling expense					120,000		120,000		120,000
Net operating Income					0		-110,000		55,000
Req 3 Absorption costing:
Construct The Absorption Costing Unit Product Cost
				Year 1	Year 2	Year 3
Direct Material				26	26	26
Direct labour				18	18	18
Variable Manufacturing overheads				9	9	9
Fixed Manufacturing overheads				9.00	7.20	13.5
Absorption costing unit prroduct cost				62.00	60.20	66.5
Construct the Absorption Costing Income Statement Under FIFO
				Year 1	Year 2	Year 3
Sales				$3,900,000	$3,250,000	4225000
Cost of Goods sold				3720000	3010000	4165000
Gross Margin				$180,000	$240,000	60000
Selling and distribution expense				180,000	170,000	185000
Net operating income				0	70,000	-125000