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		36,000
Units sold		31,000
Selling price per unit	$	79
Selling and administrative expenses:
Variable per unit	$	3
Fixed (per month)	$	564,000
Manufacturing costs:
Direct materials cost per unit	$	14
Direct labor cost per unit	$	9
Variable manufacturing overhead cost per unit	$	3
Fixed manufacturing overhead cost (per month)	$	684,000

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.

Answer 1

1-a
	Direct material	$14
	Direct labor	$9
	Variable manufacturing overhead	$3
	Fixed manufacturing overhead ($684,000/36,000)	$19
	Unit product cost	$45
1-b	High Country, Inc.
	Absorption Costing Income Statement
	Sales (31,000 x $79)	$2,449,000
	Less: Cots of goods sold (31,000 x $45)	$1,395,000
	Gross margin	$1,054,000
	Less: selling and administrative expenses (31,000 x $3) + $564,000	$657,000
	Net operating income	$397,000
2-a
	Direct material	$14
	Direct labor	$9
	Variable manufacturing overhead	$3
	Unit product cost	$26
2-b	High Country, Inc.
	Variable Costing Income Statement
	Sales (31,000 x $79)		$2,449,000
	Variable expenses:
	Variable Cost of goods sold (31,000 x $26)	$806,000
	Variable selling expense	$93,000
			$899,000
	Contribution margin		$1,550,000
	Fixed expenses:
	Fixed manufacturing overhead	$684,000
	Fixed selling and administrative expense	$564,000
			$1,248,000
	Net operating income		$302,000