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		10,000
Units sold		8,000
Selling price per unit	$	75
Selling and administrative expenses:
Variable per unit	$	6
Fixed (per month)	$	200,000
Manufacturing costs:
Direct materials cost per unit	$	20
Direct labor cost per unit	$	8
Variable manufacturing overhead cost per unit	$	2
Fixed manufacturing overhead cost (per month)	$	100,000

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	Computation of unit product cost
	Direct materials	$20
	Direct labor	$8
	Variable manufacturing overhead	$2
	Fixed manufacturing overhead($100,000/10,00 units)	$10
	Unit product cost	$40
1.b	Income Statement under Absorption costing
	Sales(8,000 units*$75)	$6,00,000
	Less:Cost of goods sold(8,000 units*$40)	$3,20,000
	Gross Margin	$2,80,000
	Less:Selling and admin expenses[($6*8,000 units)+$200,000]	$2,48,000
	Net Operating income	$32,000
2.a	Computation of unit product cost
	Direct materials	$20
	Direct labor	$8
	Variable manufacturing overhead	$2
	Unit product cost	$30
2.b	Income Statement under Variable costing
	Sales(8,000 units*$75)		$6,00,000
	Less:Variable cost:
	Manufacturing variable cost($30*10,000)	$3,00,000
	Selling variable cost($6*8,000)	$48,000	$3,48,000
	Contribution margin		$2,52,000
	Less:Fixed costs($200,000+100,000)		$3,00,000
	Net Operating income/(loss)		-$48,000