Question

Problem 6-18 Variable and Absorption Costing Unit Product Costs and Income Statements [LO6-1, LO6-2]

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	$	20
Direct labor	$	12
Variable manufacturing overhead	$	3
Variable selling and administrative	$	1
Fixed costs per year:
Fixed manufacturing overhead	$	390,000
Fixed selling and administrative expenses	$	210,000

During its first year of operations, Haas produced 50,000 units and sold 50,000 units. During its second year of operations, it produced 65,000 units and sold 40,000 units. In its third year, Haas produced 30,000 units and sold 55,000 units. The selling price of the company’s product is $48 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

Answer to Part 1.
Break Even Point (in Units) = Fixed Cost / Contribution Margin per Unit
Contribution Margin per Unit = Selling Price per Unit – Variable Expenses per Unit
Variable Expenses per Unit = $20 + $12 + $3 + 1
Variable Expenses per Unit = $36

Contribution Margin per Unit = $48 - $36
Contribution Margin per Unit = $12

Fixed Cost = $390,000 + $210,000 = $600,000

Break Even Point (in Units) = 600,000 / 12
Break Even Point (in Units) = 50,000 Units

Answer to Part 2-a.
Unit Product Cost as per Variable Costing= Direct Materials + Direct Labor + Variable Manufacturing Overhead
Unit Product Cost as per Variable Costing= $20 + $12 + $3
Unit Product Cost as per Variable Costing= $35

Unit Product cost as per Variable Costing will remain same for all year. Therefore, Unit Product Cost as per Variable Costing for Year 1, Year 2 and Year 3 is $35.

Answer to Part 3-a.
Unit Product Cost as per Absorption Costing= Direct Materials + Direct Labor + Variable Manufacturing Overhead + Fixed Manufacturing Overhead

Fixed Manufacturing Overhead per Unit = Fixed Manufacturing Overhead / Units Produced

Year 1:
Fixed Manufacturing Overhead per unit = 390,000 / 50,000 = $7.80

Unit Product Cost as per Absorption Costing = $20 + $12 + $3 + $7.80
Unit Product Cost as per Absorption Costing = $42.80

Year 2:
Fixed Manufacturing Overhead per unit = 390,000 / 65,000 = $6

Unit Product Cost as per Absorption Costing = $20 + $12 + $3 + $6
Unit Product Cost as per Absorption Costing = $41

Year 3:
Fixed Manufacturing Overhead per unit = 390,000 / 30,000 = $13

Unit Product Cost as per Absorption Costing = $20 + $12 + $3 + $13
Unit Product Cost as per Absorption Costing = $48