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	$	80
Selling and administrative expenses:
Variable per unit	$	3
Fixed (per month)	$	561,000
Manufacturing costs:
Direct materials cost per unit	$	15
Direct labor cost per unit	$	10
Variable manufacturing overhead cost per unit	$	2
Fixed manufacturing overhead cost (per month)	$	684,000

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

Ans. 1 a	In Absorption costing method, the unit product cost is the sum of all manufacturing costs per unit
	whether it is fixed or variable.
	Unit product cost under Absorption Costing:
	Direct materials	$15.00
	Direct labor	$10.00
	Variable Overhead per unit	$2.00
	Fixed overhead per unit   ($684,000 / 38,000)	$18.00
	Product Cost per unit	$45.00
	*Fixed overhead per unit = Fixed overhead / Units produced
Ans. 1 b	HIGH   COUNTRY, INC.
	Absorption Costing Income Statement
	PARTICULARS		Amount
	Sales   (33,000 * $80)		$2,640,000
	Less: Cost of goods sold
	Opening inventory	$0
	Add: Cost of goods manufactured (38,000*$45)	$1,710,000
	Cost of goods available for sale	$1,710,000
	Less: Ending inventory [(38,000 - 33,000) * $45]	-$225,000
	Cost of goods sold (total)		$1,485,000
	Gross margin		$1,155,000
	Selling & Administrative expenses:
	Fixed	$561,000
	Variable     (33,000 * $3)	$99,000
	Total Selling and administrative expenses		$660,000
	Net operating income		$495,000
	*Ending inventory   = (Units produced - Units sold) * Production cost per unit
Ans. 2 A	In variable costing method, the unit product cost is the sum of only variable
	manufacturing costs per unit
	Unit product cost under Variable Costing:
	Direct materials	$15.00
	Direct labor	$10.00
	Variable Overhead per unit	$2.00
	Total production cost per unit	$27.00
Ans. 2 b	HIGH   COUNTRY, INC.
	Variable Costing Income Statement
	PARTICULARS		Amount
	Sales   (33,000 * $80)		$2,640,000
	Less: Variable cost of goods sold:
	Opening inventory	$0
	Add: Variable cost of goods manufactured (38,000 * $27)	$1,026,000
	Variable cost of goods available for sale	$1,026,000
	Less: Ending inventory [(38,000 - 33,000) * $27]	-$135,000
	Variable cost of goods sold		$891,000
	Gross Contribution Margin		$1,749,000
	Less: Variable Selling and Administrative Expenses    (33,000 * $3)		$99,000
	Contribution Margin		$1,650,000
	Less: Fixed expenses:
	Fixed manufacturing overhead	$684,000
	Fixed selling and administrative expenses	$561,000	$1,245,000
	Net operating income		$405,000
	*Variable cost of goods manufactured = Units produced * Variable unit product cost
	*Variable Selling and Administrative Expenses = Variable Selling and Administrative Expenses per unit * Units sold