Question

A manufacturing company that produces a single product has provided the following data related to its operations during May:

Manufacturing costs:

Variable costs per unit: Direct materials $22.50

Direct labor $20.00

Variable manufacturing overhead $7.50

Fixed manufacturing overhead costs (total) $875,000

Selling and administrative costs:

Variable per unit $5.00

Fixed (total) $900,000

The product sells for $125 per unit. The company produced 35,000 units and sold 30,000 units in May. There is no beginning inventory.

Required:

a) Compute the breakeven sales dollars and margin of safety in sales dollars.

b) Determine the unit product cost under: i. Absorption costing. ii. Variable costing.

c) Prepare an income statement for the month using absorption costing.

d) Prepare a contribution format income statement for the month using variable costing.

e) Reconcile the variable costing and absorption costing net operating incomes in (c) and (d) above.

f) Suppose the company had same production volume in the following month, June but sold all units, making no ending inventory left. Fixed and variable manufacturing costs kept unchanged. Suppose the net income under Variable costing is $2,025,000. Compute the net income absorption costing. (Income statement is NOT required.)

Answer 1

a)	Breakeven sales dollars=Fixed cost/Contribution margin ratio
	Fixed cost
					$
	Manufacturing overhead costs				875000
	Selling and administrative cost				900000
	Total				1775000
	Contribution margin ratio=Contribution margin per unit/Selling price
	Contribution margin per unit=Selling price-Variable cost=125-(22.50+20+7.50+5)=$ 70
	Contribution margin ratio=70/125=0.56
	Breakeven sales dollars=1775000/0.56=$ 3169643
	Margin of safety in sales dollars=Actual sales in $-Breakeven sales dollars=(30000*125)-3169643=3750000-3169643=$ 580357
b)	Unit product cost:
i)	Variable costing:
					$
	Direct material				22.5
	Direct labor				20
	Variable manufacturing overhead				7.5
	Total				50
ii)	Absorption costing:
						$
	Direct material					22.5
	Direct labor					20
	Variable manufacturing overhead					7.5
	Fixed manufacturing overhead			(875000/35000)		25
	(Based on units produced)
	Total					75.00
c)		Variable costing income statement
					$	$
	Sales			(30000*125)		3750000
	Less: Variable cost of goods sold			(30000*50)		1500000
	Gross contribution margin					2250000
	Less: Variable selling and administrative			(30000*5)		150000
	Contribution margin					2100000
	Less:Fixed costs
	Fixed manufacturing overhead				875000
	Fixed selling and administrative				900000	1775000
	Net operating income					325000
d)		Absorption costing income statement
					$	$
	Sales			(30000*125)		3750000
	Less: Cost of goods sold			(30000*75)		2250000
	Gross profit					1500000
	Less:Selling and administrative expenses
	Variable			(30000*5)	150000
	Fixed selling				900000	1050000
	Net operating income					450000