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                 47,000

Units sold                         42,000

Selling price per unit       $ 84

Selling and administrative expenses:

Variable per unit               $ 3

Fixed (per month) $ 562,000

Manufacturing costs:

Direct materials cost per unit         $ 16

Direct labor cost per unit               $ 9

Variable manufacturing overhead cost per unit $ 1

Fixed manufacturing overhead cost (per month) $ 940,000

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

	unit cost under absorption costing(1a)	Unit cost under variable costing (2a)
Direct material	16	16
Direct labor	9	9
variable manufacturing overhead	1	1
Fixed manufacturing overhead	940000/47000=20
unit product cost	46	26

1b)

High Country, Inc. Absorption costing income statement for the month ended may
Sales revenue (42000*84)	3528000
less:cost of goods sold (46*42000)	(1932000)
Gross margin	1596000
less:selling and administration expense[42000*3]+562000]	(688000)
Net operating income	908000

2b)

High Country, Inc. variable costing income statement for the month ended may
sales revenue
less:Variable expense		3528000
variable manufacturing cost (26*42000)	1092000
variable selling and administration expense(3*42000)	126000
Total variable cost		(1218000)
contribution margin		2310000
less:fixed cost
Fixed manufacturing cost	940000
Fixed selling and administration cost	562000
Total fixed cost		(1502000)
net operating income		808000