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		38,000
Units sold		33,000
Selling price per unit	$	83
Selling and administrative expenses:
Variable per unit	$	3
Fixed (per month)	$	556,000
Manufacturing costs:
Direct materials cost per unit	$	18
Direct labor cost per unit	$	6
Variable manufacturing overhead cost per unit	$	3
Fixed manufacturing overhead cost (per month)	$	722,000

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.

Absorption Costing

Unit Cost(Absorption Costing)
Direct Material	18
Direct Labor	6
Variable Manufacturing Overhead	3
Fixed Manufacturing per unit	19
Per unit Cost	46

Income Statement
	Detail	Net
Sales		2,739,000
Less: Cost of Goods Sold
Opening Inventory	-
Add: Cost of goods Manufactured	1,748,000
Less: Closing Inventory	(230,000)	1,518,000
Gross Profit		1,221,000
Less: Selling and Administrative Cost
Variable Selling and Adm. Expenses	99,000
Fixed Selling and Adm. Expenses	556,000	655,000
Net Operating Income		566,000

2.

Variable Costing

Unit Cost(Absorption Costing)
Direct Material	18
Direct Labor	6
Variable Manufacturing Overhead	3
Per unit Cost	27

Income Statement
	Detail	Net
Sales		2,739,000
Less: Cost of Goods Sold
Opening Inventory	-
Add: Cost of goods Manufactured	1,026,000
Less: Closing Inventory	(135,000)	891,000
Gross Contribution Margin		1,848,000
Less: Variable Selling and Adm. Expenses		99,000
Contribution Margin		1,749,000
Less: Fixed Cost
Fixed Manufacturing Cost	722,000
Fixed Selling and Adm. Expenses	556,000	1,278,000
Net Operating Income		471,000