Question

Waterloo Storage Products makes a four-drawer plastic storage cabinet on casters meant for use in garages and workshops. Each cabinet sells for $40. Data for last year’s operations follow:

Units in beginning inventory		0
Units produced		22,800
Units sold		20,400
Units in ending inventory		2,400
Variable costs per unit:
Direct materials	$	9
Direct labour		11
Variable manufacturing overhead		3
Variable selling and administrative		5
Total variable cost per unit	$	28
Fixed costs:
Fixed manufacturing overhead	$	80,500
Fixed selling and administrative		115,500
Total fixed costs	$	196,000

Required:

1.	Assume that the company uses variable costing. Compute the unit product cost for one storage cabinet.

      

2.	Assume that the company uses variable costing. Prepare a contribution format income statement for the year.

      

3.	What is the company’s break-even point in terms of units sold? (Round your answer to the nearest whole number.)

      

Answer 1

1 units product cost under variable costing of Waterloo

= 3 + 9 + 11 = $23

Waterloo unit product cost under variable costing is $23

2

    Waterloo

   Variable costing

Income statement

Particulars	$	$
Sales revenue (40 × 20,400)		816,000
Variable costs:
Variable selling and administrative expenses (20,400 × 5)	102,000
Variable Manufacturing overhead (3 × 20,400)	61,200
Direct material (9 × 20,400)	183,600
Direct labour (20,400 × 11)	224,400
Less total variable costs		571,200
Fixed costs:
Fixed selling and administrative expenses	115,500
Fixed manufacturing overhead	80,500
Less total fixed costs		196,000
Operating profit		375,200

$375,200 is the Waterloo operating income.

3 Waterloo total variable cost per unit is $28 and $40 is selling price.

Waterloo contribution margin per unit

= 40 - 28 = $12

Waterloo break even point in unit

   = fixed costs / contribution margin per unit

= 196,000 / 12 = 16,333 units

Waterloo 16,333 units of cabinet are need to sold to achieve break even. Selling price charged by Waterloo is $40.