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	$	84
Selling and administrative expenses:
Variable per unit	$	3
Fixed (per month)	$	563,000
Manufacturing costs:
Direct materials cost per unit	$	14
Direct labor cost per unit	$	9
Variable manufacturing overhead cost per unit	$	4
Fixed manufacturing overhead cost (per month)	$	792,000

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 product cost under Absorption costing= $45 per unit.

Explanation- Unit product cost under Absorption costing:-Direct materials + Direct Labor+ Variable manufacturing overhead + Fixed manufacturing overhead

= $14+$9+$4+$18

= $45 per unit

Unit fixed manufacturing overhead= Fixed manufacturing overhead/No. of units produced

= $792000/44000 units

= $18 per unit

1-b)-

High Country Inc.
Income statement (Using absorption costing approach)
Particulars			Amount
			$
Sales (a)	39000 units*$84 per unit		3276000
Less:- Cost of goods sold (b)
Opening inventory
Add:-Cost of goods manufactured		1980000
Direct materials	44000 units*$14 per unit	616000
Direct labor	44000 units*$9 per unit	396000
Variable manufacturing overhead	44000 units*$4 per unit	176000
Fixed manufacturing overhead		792000
Cost of goods available for sale		1980000
Less:- Closing inventory	5000 units*$45 per unit	225000	1755000
Gross margin C= a-b			1521000
Less:-Variable selling & administrative exp.	39000 units*$3 per unit		117000
			1404000
Less:- Fixed costs
Selling & administrative exp.			563000
Net Income			841000

2-a)- Unit product cost under Variable costing= $27 per unit.

Explanation-Unit product cost under Variable costing:-Direct materials + Direct Labor+ Variable manufacturing overhead

=$14+$9+$4                 

= $27 per unit       

2-b)-

High Country Inc.
Income statement (Using variable costing approach)
Particulars			Amount
			$
Sales (a)	39000 units*$84 per unit		3276000
Less:- Variable cost of goods sold (b)
Opening inventory		NIL
Add:- Variable cost of goods manufactured		1188000
Direct materials	44000 units*$14 per unit	616000
Direct labor	44000 units*$9 per unit	396000
Variable manufacturing overhead	44000 units*$4 per unit	176000
Variable cost of goods available for sale		1188000
Less:- Closing inventory	5000 units*$27 per unit	135000	1053000
Gross contribution margin C= a-b			2223000
Less:-Variable selling & administrative exp.	39000 units*$3 per unit		117000
Contribution margin			2106000
Less:- Fixed costs
Manufacturing overhead			792000
Selling & administrative exp.			563000
Net Income			751000