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		37,000
Units sold		32,000
Selling price per unit	$	78
Selling and administrative expenses:
Variable per unit	$	3
Fixed (per month)	$	559,000
Manufacturing costs:
Direct materials cost per unit	$	16
Direct labor cost per unit	$	7
Variable manufacturing overhead cost per unit	$	1
Fixed manufacturing overhead cost (per month)	$	703,000

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

Absorption costing unit product cost
Particular	Amount
Direct material	16
Direct labor	7
Variable manufacturing overhead	1
Fixed manufacturing overhead (703,000 / 37,000)	19
Unit product cost	43
Income statement (absorption costing)
Particular	Amount
Sale ( 32,000 x 78)	2496000
Less: cost of goods sold (32,000 x 43)	1376000
Gross profit	1120000
Less: variable and fixed selling and admin. Exp
Variable (32,000 x 3)	96,000
Fixed	559000
Net income	465,000
Variable costing unit product cost
Particular	Amount
Direct material	16
Direct labor	7
Variable manufacturing overhead	1
Unit product cost	24
Income statement (variable costing)
particular	amount
sale ( 32,000 x 78)	2496000
less: variable cost:
cost of goods sold (32,000 x 24)	768000
selling and administrative expense (32,000 x 3)	96,000
contribution margin	1,632,000
less: fixed expense
manufacturing overhead	703000
selling and administrative expense	559000
net income	370,000