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	$	24
Direct labor	$	20
Variable manufacturing overhead	$	5
Variable selling and administrative	$	1
Fixed costs per year:
Fixed manufacturing overhead	$	440,000
Fixed selling and administrative expenses	$	200,000

During its first year of operations, Haas produced 40,000 units and sold 40,000 units. During its second year of operations, it produced 55,000 units and sold 30,000 units. In its third year, Haas produced 20,000 units and sold 45,000 units. The selling price of the company’s product is $66 per unit.

Required:

1. Compute the company’s break-even point in unit sales.

2. Assume the company uses variable costing: Compute the unit product cost for Year 1, Year 2, and Year 3 and Prepare an income statement for Year 1, Year 2, and Year 3.

3. Assume the company uses absorption costing: Compute the unit product cost for Year 1, Year 2, and Year 3 and Prepare an income statement for Year 1, Year 2, and Year 3.

Answer 1

	Breakeven in units = Fixed cost / contribution margin per unit
	Fixed cost	640000
	Contribution margin per unit	16	(66-50)
	Breakeven in units	40000	Units

	Variable costing	Year 1	Year 2	Year 3
	Direct material	24	24	24
	Direct labor	20	20	20
	Variable manufacturing overheads	5	5	5
	Product cost per unit	49	49	49
	Units manufactured	40000	55000	20000
	Units sold	40,000	30,000	45,000
	Income statement
	Sales revenue	2640000	1980000	2970000
Less	Variable expense
	Variable cost of goods sold	1960000	1470000	2205000
	Variable selling and admin expense	40000	30000	45000
	Total variable expense	2000000	1500000	2250000
	Contribution margin	640000	480000	720000
Less	Fixed cost
	Fixed manufacturing expense	440000	440000	440000
	Fixed Admin expense	200000	200000	200000
	Total fixed expenses	640000	640000	640000
	Net operating income	0	-160000	80000
1	Absorption costing	Year 1	Year 2	Year 3
	Direct material	24	24	24
	Direct labor	20	20	20
	Variable manufacturing overheads	5	5	5
	Fixed manufacturing	11	8	22
	Total product cost	60	57	71
	Units produced	40000	55000	20000
	Units sold	40,000	30,000	45000
	Income statement	1st year	2nd year	3rd year
	Sales revenue	2640000	1980000	2970000
	cost of goods sold
	Beginning inventory	0	0	1425000
	cost of goods manufactured	2400000	3135000	1420000
Add	Goods available for sale	2400000	3135000	2845000
	Ending inventory	0	1425000	0
Less	Cost of goods sold	2400000	1710000	2845000
	Gross profit	240000	270000	125000
	Selling and admin expenses
Less	Variable selling and admin expense	40000	30000	45000
	Fixed Admin expense	200000	200000	200000
	Total Selling and admin expenses	240000	230000	245000
	Net operating income	0	40000	-120000