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		50,000
Units sold		45,000
Selling price per unit	$	81
Selling and administrative expenses:
Variable per unit	$	4
Fixed (per month)	$	562,000
Manufacturing costs:
Direct materials cost per unit	$	16
Direct labor cost per unit	$	8
Variable manufacturing overhead cost per unit	$	2
Fixed manufacturing overhead cost (per month)	$	950,000

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

1a)	Unit product cost under absorption costing
	Direct materials				16
	direct labor				8
	variable MOH				2
	Fixed MOH		(950,000/50,000)		19
	unit product cost				45	answer
1b)	Absorption costing income statement
	sales	(45000*81)			3645000
	cost of goods sold		(45000*45)		2025000
	Gross profit				1620000
	selling & administrative expense
	variable selling&adm expense			180000
	fixed selling & adm expense			562,000	742,000
	Net income				878,000
2a)	unit product cost under variable costing
	Direct materials				16
	direct labor				8
	variable MOH				2
	unit product cost under variable costing				26
2b)	Contribution format
	Sales				3645000
	less variable expense
	cost of goods sold			1170000
	selling and adm expense			180000	1350000
	Contribtution margin				2295000
	fixed expense
	fixed MOH			950,000
	Fixed selling & adm expense			562000	1,512,000
	Net income				783,000