Question

Haas Company manufactures and sells one product. The following information pertains to each of the company’s first three years of operations:

Variable costs per unit:
Manufacturing:
Direct materials	$	25
Direct labor	$	17
Variable manufacturing overhead	$	8
Variable selling and administrative	$	3
Fixed costs per year:
Fixed manufacturing overhead	$	150,000
Fixed selling and administrative expenses	$	90,000

During its first year of operations, Haas produced 60,000 units and sold 60,000 units. During its second year of operations, it produced 75,000 units and sold 50,000 units. In its third year, Haas produced 40,000 units and sold 65,000 units. The selling price of the company’s product is $57 per unit.

Required:

1. Compute the company’s break-even point in unit sales.

2. Assume the company uses variable costing:

a. Compute the unit product cost for Year 1, Year 2, and Year 3.

b. Prepare an income statement for Year 1, Year 2, and Year 3.

3. Assume the company uses absorption costing:

a. Compute the unit product cost for Year 1, Year 2, and Year 3.

b. Prepare an income statement for Year 1, Year 2, and Year 3.

.

Zola Company manufactures and sells one product. The following information pertains to the company’s first year of operations:

Variable cost per unit:
Direct materials	$	14
Fixed costs per year:
Direct labor	$	157,250
Fixed manufacturing overhead	$	220,000
Fixed selling and administrative expenses	$	67,500

The company does not incur any variable manufacturing overhead costs or variable selling and administrative expenses. During its first year of operations, Zola produced 18,500 units and sold 14,800 units. The selling price of the company’s product is $51.30 per unit.

Required:

1. Assume the company uses super-variable costing:

a. Compute the unit product cost for the year.

b. Prepare an income statement for the year.

Answer 1

Question 1: Hass Company -

a)

Selling price per unit	57
Less: Variable Costs
Direct materials	25
Direct labor	17
Variable manufacturing overhead	8
Variable selling and administrative	3
Contribution per unit	4

Fixed Cost = Fixed manufacturing overhead + Fixed selling and administrative expenses

= 150,000​+ 90,000 = 240,000

Break even sales (in units) = Fixed Costs/ Contribution per unit

= 240,000/ 4 = 60,000 units

2 . a) Unit product cost = Direct materials +Direct labor +Variable manufacturing overhead

= 25 + 17 + 8 = 50

The unit product cost will remain the same in Year 1, Year 2 and Year 3.

b) Income Statement using Variable Costing:

Particulars	Year 1	Year 2	Year 3
Sales (No of units sold * Selling Price per unit)	3420000	2850000	3705000
Less: Variable Costs
Direct materials (No of units sold * Cost per unit)	1500000	1250000	1625000
Direct labor (No of units sold * Cost per unit)	1020000	850000	1105000
Variable manufacturing overhead (No of units sold * Cost per unit)	480000	400000	520000
Variable selling and administrative (No of units sold * Cost per unit)	180000	150000	195000
Contribution	240000	200000	260000
Less: Fixed Costs
Fixed manufacturing overhead	150000	150000	150000
Fixed selling and administrative expenses	90000	90000	90000
Net Income	0	-40000	20000

3) a)

Particulars	Year 1	Year 2	Year 3
Direct materials	25	25	25
Direct labor	17	17	17
Variable manufacturing overhead	8	8	8
Fixed Manufacturing Overheads [Fixed overheads/No of units produced]	2.5	2	3.75
Absorption cost per unit	52.5	52	53.75

b)

	Year 1	Year 2	Year 3
Sales (No of units sold * Selling Price per unit)	3420000	2850000	3705000
Less : Cost of Goods Sold	3150000	2600000	3450000
Gross Margin	270000	250000	255000
Less : Selling and administrative overheads [ Fixed + Variable]	270000	240000	285000
Net Income	0	10000	-30000