Question

Chuck Wagon Grills, Inc., makes a single product—a handmade specialty barbecue grill that it sells for $300. Data for last year’s operations follow: Units in beginning inventory 0 Units produced 10,100 Units sold 9,000 Units in ending inventory 1,100 Variable costs per unit: Direct materials $ 60 Direct labor 20 Variable manufacturing overhead 10 Variable selling and administrative 30 Total variable cost per unit $ 120 Fixed costs: Fixed manufacturing overhead $ 170,000 Fixed selling and administrative 1,450,000 Total fixed costs $ 1,620,000 Required: 1. Assume that the company uses variable costing. Compute the unit product cost for one barbecue grill. 2. Assume that the company uses variable costing. Prepare a contribution format income statement for last year. 3. What is the company’s break-even point in terms of the number of barbecue grills sold?

Answer 1

1. Calculation of unit product cost under variable costing :

Direct material per unit	$60
(+) Direct labor per unit	$20
(+) Variable manufacturing overhead per unit	$10
Unit product cost	$90

2. Contribution format income statement :

	Amount ($)	Amount ($)
Sales [ units sold * selling price = 9,000 units * $300 ]		$2,700,000
(-) Variable costs :
Variable cost of goods sold [ refer working note ]	$810,000
Variable selling and administrative costs [ units sold * variable selling and administrative cost per unit = 9,000 units * $30 ]	$270,000	( $1,080,000 )
Contribution margin		$1,620,000
(-) Fixed costs :
Fixed manufacturing overhead	$170,000
Fixed selling and administrative costs	$1,450,000	( $1,620,000 )
Net income		$0

Working note :

Opening inventory	$0
(+) Variable cost of goods manufactured [ Unit product cost * Units manufactured = $90 * 10,100 units ]	$909,000
(-) Less ending inventory [ unit product cost * ending inventory units = $90 * 1,100 units ]	( $99,000 )
Variable cost of goods sold	$810,000

3. Contribution margin per unit = selling price per unit - total variable cost per unit = $300 - $120 = $180

Break-even point in units = Total fixed costs / Contribution margin per unit = $1,620,000 / $180 = 9,000 units of barbecue.