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	$	21
Direct labor	$	13
Variable manufacturing overhead	$	8
Variable selling and administrative	$	1
Fixed costs per year:
Fixed manufacturing overhead	$	600,000
Fixed selling and administrative expenses	$	240,000

During its first year of operations, Haas produced 60,000 units and sold 60,000 units. During its second year of operations, it produced 75,000 units and sold 50,000 units. In its third year, Haas produced 40,000 units and sold 65,000 units. The selling price of the company’s product is $57 per unit.

Required:

1. Compute the company’s break-even point in unit sales.

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.

b. Prepare an income statement for Year 1, Year 2, and Year 3.

Answer 1

1
Variable costs per unit = 21+13+8+1= $43
Fixed costs per year = 600000+240000 = $840000
Break-even point in unit sales = Fixed costs/Unit contribution margin = 840000/(57-43)= 60000
2a
	Year 1	Year 2	Year 3
Direct materials	21	21	21
Direct labor	13	13	13
Variable manufacturing overhead	8	8	8
Unit product cost	42	42	42
b
Variable Costing Income Statement
	Year 1	Year 2	Year 3
Sales	3420000	2850000	3705000
Variable expenses:
Variable cost of goods sold	2520000	2100000	2730000
Variable selling and administrative	60000	50000	65000
Total variable expenses	2580000	2150000	2795000
Contribution margin	840000	700000	910000
Fixed expenses:
Fixed manufacturing overhead	600000	600000	600000
Fixed selling and administrative	240000	240000	240000
Total Fixed expenses	840000	840000	840000
Net operating income	0	-140000	70000
3a
	Year 1	Year 2	Year 3
Direct materials	21	21	21
Direct labor	13	13	13
Variable manufacturing overhead	8	8	8
Fixed manufacturing overhead	10	8	15
Unit product cost	52	50	57
3b
Absorption Costing Income Statement
	Year 1	Year 2	Year 3
Sales	3420000	2850000	3705000
Cost of goods sold	3120000	2500000	3530000
Gross margin	300000	350000	175000
Selling and administrative expenses	300000	290000	305000
Net operating income	0	60000	-130000