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 43,000 Units sold 38,000 Selling price per unit $85 Selling and administrative expenses: Variable per unit $3 Fixed per month $ 562,000 Manufacturing costs: Direct materials cost per unit $17 Direct labor cost per unit $7 Variable manufacturing overhead cost per unit $2 Fixed manufacturing overhead cost per month $ 731,000 Management is anxious to see how profitable the new camp cot will be and has asked that an income statement be prepared for 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.

Answer 1

1. Assume that the company uses absorption costing.

a. The unit product cost will include direct material cost per unit, direct labor cost per unit, variable manufacturing overhead cost per unit, Fixed manufacturing overhead cost .

Direct materials cost per unit = $17

Direct labor cost per unit = $7

Variable manufacturing overhead cost per unit = $2

Fixed manufacturing overhead cost per month / units produced = $ 731,000 / 43000 = $17

Therefore, unit product cost = $ 43

b. income statement separates inventory costs from selling and administrative costs.

Sales ( $ 85 x 38,000 )		32,30,000
Less: Cost of goods sold ( $43 x 38,000 )		(16,34,000)
Gross Profit		15,96,000
Less: Selling and administrative expenses
Variable ( $ 3 x 38000 )	( $ 1,14 000 )
Fixed per month	( $ 5,62,000 )	( $ 6,76,000)
Net operating Income		$ 9,20,000

2. Assume that the company uses variable costing.

a. In determining the unit product cost, variable costing does not include fixed manufacturing overhead.

Direct materials cost per unit = $17

Direct labor cost per unit = $7

Variable manufacturing overhead cost per unit = $2

Therefore, unit product cost = $ 26

b. A contribution format income statement separates variable and period/fixed expenses.

sales ( $ 85 x 38,000 )		32,30,000
Less : variable cost of goods sold ( $ 26 x 38,000 )		(9,88,000)
Gross contribution margin		22,42,000
Less : variable selling & administration expenses ($ 3 x 38,000 )		(1,14,000)
Contribution margin		$21,28,000
Less: Period expenses
Fixed manufacturing overhead cost per month	($ 7,31,000)
Fixed selling and administrative expenses per month	($5,62,000)	(12,93,000)
Net operating income		$ 8,35,000