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)	Unit Product Cost	40.00
	Direct Material	20.00
	Direct Labour	8.00
	Manufacturing OH (Variable)	2.00
	Fixed Manufacturing OH (Per Unit)	10.00
	(Fixed Manufacturing OH / Units Produced)
	Total Product Cost	40.00
1 (B)	High Country,Inc.
	Absorption Costing Income Statement
	Sales	600,000
	Less: Cost of Goods Sold	320,000
	Gross profit Margin	280,000
	Less: Selling and Administrative Expense	248,000
	Net Income	32,000
2 (A)	Unit Product Cost	30.00
	Direct Material	20.00
	Direct Labour	8.00
	Manufacturing OH (Variable)	2.00
	Total Product Cost	30.00
2(B)	High Country,Inc.
	Variable Costing Income Statement
	Sales		600,000
	Less: Variable Cost
	Direct Material	160000
	Direct Labour	64000
	Manufacturing OH (Variable)	16000
	Less:Selling and Administrative Expense(Variable)	48000
	Total Variable Cost		288000
	Contribution Margin		312,000
	Less: Fixed Expenses
	Fixed Manufacturing OH	100000
	Selling and Administrative Expense(Fixed)	200000	300000
	Net Income		12,000