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 44,000

Units sold 39,000

Selling price per unit $ 81

Selling and administrative expenses:

Variable per unit $ 2

Fixed (per month) $ 566,000

Manufacturing costs:

Direct materials cost per unit $ 15

Direct labor cost per unit $ 7

Variable manufacturing overhead cost per unit $ 2

Fixed manufacturing overhead cost (per month) $ 704,000

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

1. Assume that the company uses absorption costing.

a. Determine the unit product cost.

Direct material	15
Direct labor	7
Variable manufacturing overhead	2
Fixed manufacturing overhead (704000/44000)	16
Unit product cost	40

b) Income statement

Sales (39000*81)	3159000
Cost of goods sold (39000*40)	-1560000
Gross profit	1599000
Selling and administrative expense (39000*2+566000)	-644000
Net operating income	955000

2. Assume that the company uses Variable costing.

a. Determine the unit product cost.

Direct material	15
Direct labor	7
Variable manufacturing overhead	2
Unit product cost	24

b) Income statement

Sales (39000*81)	3159000
Variable Cost of goods sold (39000*24)	-936000
Manufacturing margin	2223000
Variable selling and administrative expense	-78000
Contribution margin	2145000
Fixed cost
Fixed manufacturing overhead	704000
Fixed Selling and administrative expense	566000
Net operating income	875000