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		47,000
Units sold		42,000
Selling price per unit	$	81
Selling and administrative expenses:
Variable per unit	$	2
Fixed (per month)	$	562,000
Manufacturing costs:
Direct materials cost per unit	$	17
Direct labor cost per unit	$	7
Variable manufacturing overhead cost per unit	$	3
Fixed manufacturing overhead cost (per month)	$	940,000

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

Answer:- 1-)a)-Unit fixed manufacturing overhead= fixed manufacturing overhead/No. of units produced

=$940000/47000 units =$20 per unit

Unit product cost under Absorption costing for one unit:-Direct materials + Direct Labor+ Variable manufacturing overhead + fixed manufacturing overhead

=$17+$7+$3+$20 = $47 per unit

b)-

High Country Inc.Income statement (using Absorption costing )
Particulars			Amount
			$
Sales (a)	42000 units*$81 per unit		3402000
Less:- Cost of goods sold (b)
Opening inventory		NIL
Add:-Cost of goods manufatured	47000 units*$47 per unit	2209000
Cost of goods available for sale		2209000
Less:- Closing inventory	5000 units*$47 per unit	235000	1974000
Gross profit C= a-b			1428000
Less:- Opreating Expenses
Fixed selling & Administrative expenses			562000
Selling & administrative exp.	42000 units*$2 per unit		84000
Net Opreating Income			782000

2)a)-

Unit product cost under variable costing for one unit:-Direct materials + Direct Labor+ Variable manufacturing overhead

=$17+$7+$3 = $27 per unit

b)-

High Country Inc, Income statement using variable costing
Particulars			Amount
			$
Sales (a)	42000 units*$81 per unit		3402000
Less:- Variable cost of goods sold (b)
Opening inventory		Nil
Add:- Variable cost of goods manufatured	47000 units*$27 per unit	1269000
Variable cost of goods available for sale		1269000
Less:- Closing inventory	5000 units*$27 per unit	135000	1134000
Gross contribution margin C= a-b			2268000
Less:-Selling & administrative exp.	42000 units*$2 per unit		84000
Contribution margin			2184000
Less:- Period Expenses
Fixed manufacturing overhead			940000
Fixed selling & Administrative expenses			562000
Net Opreating Income			682000