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	$	26
Direct labor	$	18
Variable manufacturing overhead	$	6
Variable selling and administrative	$	3
Fixed costs per year:
Fixed manufacturing overhead	$	390,000
Fixed selling and administrative expenses	$	150,000

During its first year of operations, Haas produced 60,000 units and sold 60,000 units. During its second year of operations, it produced 75,000 units and sold 50,000 units. In its third year, Haas produced 40,000 units and sold 65,000 units. The selling price of the company’s product is $62 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

Break Even Unit Sales = Total Fixed Cost / Contribution Margin Per Unit
Total Fixed Cost = Fixed Manufacturing Overhead + Fixed Selling and admin expenses = 390,000 + 150,000 = 540,000	540000
Calculation of Contribution Margin Per Unit
	$ per Unit
Selling Price	62
Total Variable Cost
Direct Material	$26
Direct Labor	$18
Variable Manufacturing Overhead	$6
Variable Selling and administrative expenses	$3
Total Variable Cost	$53
Contribution Margin (62 – 53)	$9
Break Even Unit Sales = 540000 / 9		$60,000
2(a) – Calculation of Unit Product Cost under variable costing
	Unit Product Cost
	Year 1	Year 2	Year 3
Direct Material	$26	$26	$26
Direct Labor	$18	$18	$18
Variable Manufacturing Overhead	$6	$6	$6
Unit Product Cost	$50	$50	$50
2(b)
Hass Company
Variable Costing Income Statement
	Year 1	Year 2	Year 3
	60000	75000	40000
Sales (Units Sold x $62)	$3,720,000	$3,100,000	$4,030,000
Variable expenses:
Direct Material (Unit Produced x 26)	$1,560,000	$1,950,000	$1,040,000
Direct Labor (Unit produced x 18)	$1,080,000	$1,350,000	$720,000
Variable Manufacturing Overhead (Unit produced x 6)	$360,000	$450,000	$240,000
Production Cost	$3,000,000	$3,750,000	$2,000,000
Add: Beginning Inventory (Beginning inventory from note 1 x Unit Product Cost from Part 2(a))	$0	$0	$1,250,000
Less: Ending Inventory (Ending Inventory Units from Note 1 x Unit Product Cost from Part 2(a))	$0	($1,250,000)	$0
Variable Production Cost	$3,000,000	$2,500,000	$3,250,000
Add: Variable Selling and administrative expenses (Units Sold x 3)	$180,000	$150,000	$120,000
Total Variable expenses	$3,180,000	$2,650,000	$3,370,000
Contribution Margin (Sales - Total Variable Expenses)	$540,000	$450,000	$660,000
Fixed Expenses:
Fixed Manufacturing Overhead	$390,000	$390,000	$390,000
Fixed Selling and administrative expenses	$150,000	$150,000	$150,000
Total fixed expenses	$540,000	$540,000	$540,000
Net Operating Income (loss)	$0	($90,000)	$120,000
Note 1 –
	Year 1	Year 2	Year 3
Units Produced	60,000	75,000	40,000
Units Sold	60,000	50,000	65,000
Ending Inventory	0	25,000	0
Beginning Inventory	0	0	25,000
3(a) – Unit Product Cost under absorption costing
	Unit Product Cost
	Year 1	Year 2	Year 3
Direct Material	$26	$21	$21
Direct Labor	$18	$13	$13
Variable Manufacturing Overhead	$6	$4	$4
Fixed Manufacturing Overhead Per Unit (380,000 / Units Produced)	$6	$5	$10
Unit Product Cost	$56	$43	$48