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	$	29
Direct labor	$	21
Variable manufacturing overhead	$	5
Variable selling and administrative	$	1
Fixed costs per year:
Fixed manufacturing overhead	$	330,000
Fixed selling and administrative expenses	$	150,000

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 $64 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.

Answer 1

1)	Break even unit sales = total fixed cost/contribution margin
	total fixed cost
	fixed manufacturing overhead				330,000
	fixed selling & administrative				150,000
	total fixed cost				480,000
	contribution margin per unit
	Selling price per unit				64
	less variable cost
	Direct mterials			29
	direct labor			21
	VMOH			5
	Variable selling & adm expense			1	56
	contribution margin per unit				8
	Break even unit sales = 480,000/8
			60000	units	answer
2a)	unit product cost under variable costing
	Direct mterials			29
	direct labor			21
	VMOH			5
	total unit product cost			55
				year 1	year 2	year 3
	unit product cost			55	55	55
b)	Variable costing income statement
	units sold				60,000	50,000	65,000
					year 1	year 2	year 3
	sales				3840000	3200000	4160000
	variable expenses
	variable cost of goods sold				3300000	2750000	3575000
	variable selling & adm expense				60000	50000	65000
	total variable expense				3360000	2800000	3640000
	contribution margin				480000	400000	520000
	fixed xpenses:
	fixed manufacturing overhead				330,000	330,000	330,000
	fixed selling & adm expnes				150,000	150,000	150,000
	total fixed expense				480,000	480,000	480,000
	net income /loss				0	-80,000	40,000
3a)	Absorptiong costing
				year 1	year 2	year 3
	Direct mterials			29	29	29
	direct labor			21	21	21
	VMOH			5	5	5
	FMOH	(330000/units prod)		5.5	4.4	8.25
	total unit product cost			60.5	59.4	63.25
				year 1	year 2	year 3
	unit product cost			60.5	59.4	63.25
3b)	income statement
				year 1	year 2	year 3
	sales			3840000	3200000	4160000
	cost of goods sold			3630000	2970000	4015000
	gross margin			210000	230000	145000
	Selling and adm exp			210,000	200,000	215,000
	net income/loss			0	30,000	-70,000
	cost of goods sold for year 3 = 25000*59.4 + 40000*63.25
	year 2 = 50000*59.4
			year 1 = 60000*60.5