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 $20   
      Direct labor $12   
      Variable manufacturing overhead $3   
    Variable selling and administrative $1   
  Fixed costs per year:
    Fixed manufacturing overhead $ 390,000   
    Fixed selling and administrative expenses $ 210,000   

  

During its first year of operations, Haas produced 50,000 units and sold 50,000 units. During its second year of operations, it produced 65,000 units and sold 40,000 units. In its third year, Haas produced 30,000 units and sold 55,000 units. The selling price of the company’s product is $48 per unit.

  
Required:

1. Compute the company’s break-even point in units sold.

     

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. (Round your intermediate and final answers to 2 decimal places.)

            

b.

Prepare an income statement for year 1, year 2, and year 3. (Round your intermediate calculations to 2 decimal places.)

         

Answer 1

Solution:

Part 1 -- Break Even Point

Break Even Point is the level of sales at which costs are equal to sales revenue and profit is zero. In other words, at break even point contribution margins are equal to total fixed cost.

Break Even Point in unit sold = Total Fixed Costs / Contribution Margin Per Unit

Contribution Margin Per Unit = Unit Selling Price – Total Variable Cost per unit

= $48 – (20+12+3+1)

= 48 - 36

= 12

Total Fixed Costs = Fixed MFR OH 390,000 + S&A Expenses 210,000 = $600,000

Break Even Point in unit sold = Total Fixed Costs $600,000 / Contribution Margin Per Unit $12

= 50,000 Units

2 (a) Calculation of unit product cost for year 1, year 2, and year 3 assuming company uses Variable Costing

Variable Costing System

1) Product Cost refers to the costs used to fabricate/make/produce a product.

2) Under Variable Costing System, product cost includes only following variable manufacturing costs:

- Cost of direct material used

- Direct labor cost

- Variable manufacturing overheads.

3) Under this system, fixed costs are not considered in product cost and for valuation of closing stock of finished goods. Fixed costs are treated as period cost in this system.

4) The value of finished goods and work in process is also comprised only of Manufacturing Variable Costs.

5) Selling and administrative expenses are not included because these are not the expenses incurred in production department. These expenses relate to selling and admin department.

Unit Product Cost	Year 1	Year 2	Year 3
Direct materials	$20	$20	$20
Direct labor	$12	$12	$12
Variable manufacturing overhead	$3	$3	$3
Variable Manufacturing Cost (Unit Product Cost)	$35	$35	$35

Part 2(b) – Income Statement using variable costing

Income Statement (Variable Costing)
	Year 1	Year 2	Year 3
Sale Revenue	$2,400,000 (50,000*48)	$1,920,000 (40,000*48)	$2,640,000 (55,000*48)
Cost of Goods Sold:
Variable Manufacturing Cost (Unit Product Cost x Units Produced)	$1,750,000 (50,000*35)	$2,275,000 (65,000*35)	$1,050,000 (30,000*35)
Add: Beginning Inventory	$0	$0	$875,000 (25,000*35)
Total Cost of Goods Available for Sale	$1,750,000	$2,275,000	$1,925,000
Less: Ending Inventory	$0	$875,000 (25,000*35)	$0
Variable Cost of Goods Sold	$1,750,000	$1,400,000	$1,925,000
Add: Variable Selling and Administrative Expense (Unit Sold x Unit S&A Expense)	$50,000 (50,000*$1)	$40,000 (40,000*$1)	$550,000 (55,000*$1)
Total Variable Cost	$1,800,000	$1,440,000	$2,475,000
Contribution Margin (Sales - Total Variable Cost)	$600,000	$480,000	$165,000
Fixed Costs:
Fixed manufacturing overhead	$390,000	$390,000	$390,000
Fixed selling and administrative expenses	$210,000	$210,000	$210,000
Total Fixed Costs	$600,000	$600,000	$600,000
Operating Profit (Contribution Margin - Total Fixed Costs)	$0	-$120,000	-$435,000

Part 3(a) --- Unit Product Cost using Absorption Costing

Absorption Costing System

- Product Cost refers to the costs used to fabricate/make/produce a product.

- Under Absorption Costing, product cost includes both fixed and variable manufacturing expenses incurred in fabrication of the product or service.

- It includes cost of direct material used, cost of direct labor, consumable supplies used and manufacturing/factory overheads (both variable as well as fixed factory overhead).

- Ending Inventory is valued on Production Cost.

- Product Cost does not include Selling, General and Administrative Expenses.

Unit Product Cost	Year 1	Year 2	Year 3
Direct materials	$20	$20	$20
Direct labor	$12	$12	$12
Variable manufacturing overhead	$3	$3	$3
Per Unit Fixed Manufacturing Overhead (Total Fixed MF OH / Units Produced)	$8 (390,000 / 50,000)	$6 (390,000 / 65,000)	$13 (390,000 / 30,000)
Unit Product Cost (Production Cost per unit)	$43	$41	$48

Part 3(b) --- Income Statement using Absorption Costing

Income Statement (Absorption Costing)
	Year 1	Year 2	Year 3
Sale Revenue	$2,400,000	$1,920,000	$2,640,000
Cost of Goods Sold:
Total Manufacturing Cost (Unit Product Cost x Units Produced)	$2,150,000 (43*50,000)	$2,665,000 (41*65000)	$1,440,000 (48*30,000)
Add: Beginning Inventory	$0	$0	$1,025,000 (25,000*41)
Total Cost of Goods Available for Sale	$2,150,000	$2,665,000	$2,465,000
Less: Ending Inventory	$0	$1,025,000 (25,000*41)	$0
Cost of Goods Sold	$2,150,000	$1,640,000	$2,465,000
Gross Profit (Sales - COGS)	$250,000	$280,000	$175,000
Selling and Administrative Expenses:
Variable Selling and Administrative Expense (Unit Sold x Unit S&A Expense)	$50,000	$40,000	$550,000
Fixed selling and administrative expenses	$210,000	$210,000	$210,000
Total Selling and administrative Expenses	$260,000	$250,000	$760,000
Operating Profit (Gross Profit - S&A Expenses)	-$10,000	$30,000	-$585,000

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