Question

Chuck Wagon Grills, Inc., makes a single product—a handmade specialty barbecue grill that it sells for $300. Data for last year’s operations follow:  

Units in beginning inventory		0
Units produced		10,200
Units sold		8,700
Units in ending inventory		1,500
Variable costs per unit:
Direct materials	$	60
Direct labor		20
Variable manufacturing overhead		10
Variable selling and administrative		30
Total variable cost per unit	$	120
Fixed costs:
Fixed manufacturing overhead	$	180,000
Fixed selling and administrative		1,080,000
Total fixed costs	$	1,260,000

Required:

1. Assume that the company uses variable costing. Compute the unit product cost for one barbecue grill.

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

3. What is the company’s break-even point in terms of the number of barbecue grills sold?

Answer 1

Answer- 1)- Unit product cost under Variable costing =$90 per barbecue grill

Explanation-

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

=$60+$20+$10 = $90 per barbecue grill

2)-

CHUCL WAGON GRILLS INC.
Income statement (Using variable costing approach)
Particulars			Amount
			$
Sales (a)	8700 units*$300 per unit		2610000
Less:- Variable cost of goods sold (b)
Opening inventory		NIL
Add:- Variable cost of goods manufactured		918000
Direct materials	10200 units*$60 per unit	612000
Direct labor	10200 units*$20 per unit	204000
Variable manufacturing overhead	10200 units*$10 per unit	102000
Variable cost of goods available for sale		918000
Less:- Closing inventory	1500 units*$90 per unit	135000	783000
Gross contribution margin C= a-b			1827000
Less:-Variable selling & administrative exp.	8700 units*$30 per unit		261000
Contribution margin			1566000
Less:- Fixed costs
Manufacturing overhead			180000
Selling & administrative exp.			1080000
Net Income			306000

3)- The company’s break-even point in terms of the number of barbecue grills sold is =7000 units

Explanation-

Break even point in units = Total fixed costs/Contribution margin per unit

= $1260000/($300 per unit-$120 per unit)

=$1260000/$180 per unit

=7000 units