Question

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

1)	Break even unit sales = total fixed cost/contribution margin
	total fixed cost
	fixed manufacturing overhead				390,000
	fixed selling & administrative				210,000
	total fixed cost				600,000
	contribution margin per unit
	Selling price per unit				48
	less variable cost
	Direct mterials			20
	direct labor			12
	VMOH			3
	Variable selling & adm expense			1	36
	contribution margin per unit				12
	Break even unit sales = 600,000/12
			50000	units	answer
2a)	unit product cost under variable costing
	Direct mterials			20
	direct labor			12
	VMOH			3
	total unit product cost			35
				year 1	year 2	year 3
	unit product cost			35	35	35
b)	Variable costing income statement
	units sold				50,000	40,000	55,000
					year 1	year 2	year 3
	sales				2400000	1920000	2640000
	variable expenses
	variable cost of goods sold				1750000	1400000	1925000
	variable selling & adm expense				50000	40000	55000
	total variable expense				1800000	1440000	1980000
	contribution margin				600000	480000	660000
	fixed xpenses:
	fixed manufacturing overhead				390,000	390,000	390,000
	fixed selling & adm expnes				210,000	210,000	210,000
	total fixed expense				600,000	600,000	600,000
	net income /loss				0	-120,000	60,000
3a)	Absorptiong costing
				year 1	year 2	year 3
	Direct mterials			20	20	20
	direct labor			12	12	12
	VMOH			3	3	3
	FMOH	(390000/units prod)		7.8	6	13
	total unit product cost			42.8	41	48
				year 1	year 2	year 3
	unit product cost			42.8	41	48
3b)	income statement
				year 1	year 2	year 3
	sales			2400000	1920000	2640000
	cost of goods sold			2140000	1640000	2465000
	gross margin			260000	280000	175000
	Selling and adm exp			260,000	250,000	265,000
	net income/loss			0	30,000	-90,000
	cost of goods sold for year 3 = 25000*41 + 30000*48