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		43,000
Units sold		38,000
Selling price per unit	$	82
Selling and administrative expenses:
Variable per unit	$	3
Fixed (per month)	$	555,000
Manufacturing costs:
Direct materials cost per unit	$	17
Direct labor cost per unit	$	9
Variable manufacturing overhead cost per unit	$	4
Fixed manufacturing overhead cost (per month)	$	645,000

Management is anxious to assess the profitability of the new camp cot during the month of May.

Required:

Assume that the company uses absorption costing.

1a. Determine the unit product cost.

1b. Prepare an income statement for May.

Assume that the company uses variable costing.

2a. Determine the unit product cost.

2b. Prepare a contribution format income statement for May.

Answer 1

Answer-1-a)- Unit product cost under Absorption costing:-Direct materials + Direct Labor+ Variable manufacturing overhead + fixed manufacturing overhead

=$17+$9+$4+$15 = $45 per unit

Unit fixed manufacturing overhead= fixed manufacturing overhead/No. of units produced

=$645000/43000 units =$15 per unit

1-b)-

HIGH COUNTRY INC.
Income statement (Using absorption costing approach)
Particulars			Amount
			$
Sales (a)	38000 units*$82 per unit		3116000
Less:- Cost of goods sold (b)
Opening inventory
Add:- Cost of goods manufactured		1935000
Direct materials	43000 units*$17 per unit	731000
Direct labor	43000 units*$9 per unit	387000
Variable manufacturing overhead	43000 units*$4 per unit	172000
Fixed manufacturing overhead		645000
Cost of goods available for sale		1935000
Less:- Closing inventory	5000 units*$45 per unit	225000	1710000
Gross Income (c= a-b)			1406000
Less:-Variable selling & administrative exp.	38000 units*$3 per unit		114000
			1292000
Less:- Fixed costs
Selling & administrative exp.			555000
Net Income			737000

Answer-2-a)-Unit product cost under Variable costing:-Direct materials + Direct Labor+ Variable manufacturing overhead

=$17+$9+$4 = $30 per unit

2-b)-

HIGH COUNTRY INC.
Income statement (Using variable costing approach)
Particulars			Amount
			$
Sales (a)	38000 units*$82 per unit		3116000
Less:- Variable cost of goods sold (b)
Opening inventory		NIL
Add:- Variable cost of goods manufactured		1290000
Direct materials	43000 units*$17 per unit	731000
Direct labor	43000 units*$9 per unit	387000
Variable manufacturing overhead	43000 units*$4 per unit	172000
Variable cost of goods available for sale		1290000
Less:- Closing inventory	5000 units*$30 per unit	150000	1140000
Gross contribution margin C= a-b			1976000
Less:-Variable selling & administrative exp.	38000 units*$3 per unit		114000
Contribution margin			1862000
Less:- Fixed costs
Manufacturing overhead			645000
Selling & administrative exp.			555000
Net Income			662000