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		49,000
Units sold		44,000
Selling price per unit		$77
Selling and administrative expenses:
Variable per unit		$4
Fixed per month	$	567,000
Manufacturing costs:
Direct materials cost per unit		$17
Direct labor cost per unit		$6
Variable manufacturing overhead cost per unit		$3
Fixed manufacturing overhead cost per month	$	784,000

  

Management is anxious to see how profitable the new camp cot will be and has asked that an income statement be prepared for 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

a
Direct materials cost per unit	17
Direct labor cost per unit	6
Variable manufacturing overhead cost per unit	3
Fixed manufacturing overhead cost per unit	16	=784000/49000
Unit product cost	42
b
Sales	3388000	=44000*77
Cost of goods sold	1848000	=44000*42
Gross margin	1540000
Selling and administrative expenses	743000	=567000+(44000*4)
Net operating income	797000
2a
Direct materials cost per unit	17
Direct labor cost per unit	6
Variable manufacturing overhead cost per unit	3
Unit product cost	26
b
Sales		3388000
Variable expenses:
Variable cost of goods sold	1144000
Variable selling and administrative expenses	176000
Total Variable expenses		1320000
Contribution margin		2068000
Fixed expenses:
Fixed manufacturing overhead	784000
Fixed selling and administrative expenses	567000
Total Fixed expenses		1351000
Net operating income		717000