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		50,000
Units sold		45,000
Selling price per unit	$	78
Selling and administrative expenses:
Variable per unit	$	4
Fixed (per month)	$	560,000
Manufacturing costs:
Direct materials cost per unit	$	15
Direct labor cost per unit	$	7
Variable manufacturing overhead cost per unit	$	2
Fixed manufacturing overhead cost (per month)	$	900,000

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.

PLEASE EXPLAIN AND BOLD ALL ANSWERS THANKS

1A. Determine the unit product cost. Assume that the company uses absorption costing.

	Unit product cost

1B. Prepare an income statement for May. Assume that the company uses absorption costing.

Advertising
Beginning merchandise inventory
Commissions
Cost of goods sold
Depreciation
Direct labor
Direct materials
Ending merchandise inventory
Fixed manufacturing overhead
Indirect labor
Indirect materials
Purchases
Sales
Selling and administrative expenses
Variable manufacturing overhead

	High Country, Inc. Absorption Costing Income Statement

2A... Determine the unit product cost. Assume that the company uses variable costing.

	Unit product cost

2B... Prepare a contribution format income statement for May. Assume that the company uses variable costing.

Advertising Beginning merchandise inventory Commissions Depreciation Ending merchandise inventory Fixed manufacturing overhead Fixed selling and administrative expense Indirect labor Indirect materials Purchases Sales Variable cost of goods sold Variable selling expense

	High Country, Inc. Variable Costing Income Statement

Answer 1

1(a)Unit Product Cost - Absorbtion Costing
	Unit Cost
Direct Materials	$15
Direct Labor	$7
Variable Manufacturing Overhead	$2
Fixed Manufacturing Overhead ($90000/50000)	$18
Total Unit Cost	$42

1(b) Income Statement-Using Absorption Costing
	Amount	Amount
Sales (45000 *$78)		$3,510,000
Less: Cost of goods sold:
Beginning inventory	$0
Ad: Cost of goods produced (50000*42)	$2,100,000
Costs of goods available for sale	$2,100,000
Less: Ending inventory (5000*$42)	$210,000
Cost of goods sold		$1,890,000
Gross Profit		$1,620,000
Less: Selling & Administration Exp:
Variable ($4*45000)	$180,000
Fixed	$560,000	$740,000
Net Operating Income		$880,000

2(a)(Unit Product Cost- Variable Costing
Direct Materials	$15
Direct Labor	$7
Variable Manufacturing Overhead	$2
Variable Selling & Adm Cost	$4
Total Unit Cost	$28

2(b) INCOME STATEMENT USING VARIABLE COSTING
Sales (45000 *$78)		$3,510,000
Variable Cost ($28*45000)		$1,260,000
Gross Contribution Margin		$2,250,000
Less: Fixed costs:
Fixed Manufacturing Cost	$900,000
Selling and administration	$560,000	$1,460,000
Net Operating Income		$790,000