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	$	29
Direct labor	$	21
Variable manufacturing overhead	$	9
Variable selling and administrative	$	3
Fixed costs per year:
Fixed manufacturing overhead	$	420,000
Fixed selling and administrative expenses	$	180,000

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 $72 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)
	Sales per unit				$           72.00
Less:	Variable Costs:
	Direct Material			$   29.00
	Direct Labor			$   21.00
	Variable Manu. OH			$      9.00
	Variable Selling and Adm. OH			$      3.00	$           62.00
	Contribution Margin per unit				$           10.00
	Total Fixed Cost
	Fixed Manu. OH				$ 420,000.00
	Fixed selling and Adm. OH				$ 180,000.00
	Total				$ 600,000.00
	Break even point in unit sales				Fixed Cost / Cont. Margin per unit
				=	$ 600000 / $ 10
				=	60000	units

2)
a)	Particulars			Year 1	Year 2	Year 3
	Direct Material			$   29.00	$   29.00	$   29.00
	Direct Labor			$   21.00	$   21.00	$   21.00
	Variable Manu. OH			$      9.00	$      9.00	$      9.00
	Unit product cost			$   59.00	$   59.00	$   59.00

2)
b)	Income Statement
					Year 1	Year 2	Year 3
	Units sold				60000	50000	65000
	Selling price per unit				$              72.00	$              72.00	$              72.00
	Sales			(A)	$ 4,320,000.00	$ 3,600,000.00	$ 4,680,000.00
Less:	Variable costs
	Direct Material				$ 1,740,000.00	$ 1,450,000.00	$ 1,885,000.00
	Direct Labor				$ 1,260,000.00	$ 1,050,000.00	$ 1,365,000.00
	Variable Manu. OH				$    540,000.00	$    450,000.00	$    585,000.00
	Variable Selling and Adm. OH				$    180,000.00	$    150,000.00	$    195,000.00
	Total Variable Costs			(B)	$ 3,720,000.00	$ 3,100,000.00	$ 4,030,000.00
	Contribution Margin			(A-B=C)	$    600,000.00	$    500,000.00	$    650,000.00
Less:	Fixed Costs
	Fixed Manu. OH				$    420,000.00	$    420,000.00	$    420,000.00
	Fixed selling and Adm. OH				$    180,000.00	$    180,000.00	$    180,000.00
	Total Fixed Costs			(D)	$    600,000.00	$    600,000.00	$    600,000.00
	Net Operating Income			(C-D)	$                     -	$   (100,000.00)	$      50,000.00

3)
a)	Particulars			Year 1	Year 2	Year 3
	Direct Material			$   29.00	$   29.00	$   29.00
	Direct Labor			$   21.00	$   21.00	$   21.00
	Variable Manu. OH			$      9.00	$      9.00	$      9.00
	Fixed Manu. OH		(W.N.1)	$      7.00	$      5.60	$   10.50
	Total Product Cost			$   66.00	$   64.60	$   69.50

W.N.1
Particulars			Year 1	Year 2	Year 3
Fixed Manu. OH			$ 420,000.00	$ 420,000.00	$ 420,000.00
No. of units produced			60000	75000	40000
Fixed Manu. OH per unit			$             7.00	$             5.60	$           10.50

3)
b)	Income Statement
					Year 1	Year 2	Year 3
	Units sold				60000	50000	65000
	Selling price per unit				$               72.00	$               72.00	$               72.00
	Sales				$ 4,320,000.00	$ 3,600,000.00	$ 4,680,000.00
Less:	Cost of Goods sold			(W.N.2)	$ 3,960,000.00	$ 3,230,000.00	$ 4,395,000.00
	Gross Profit			(A)	$     360,000.00	$     370,000.00	$     285,000.00
Less:	Selling and Adm. Expenses
	Variable				$     180,000.00	$     150,000.00	$     195,000.00
	Fixed				$     180,000.00	$     180,000.00	$     180,000.00
	Total Fixed Expenses			(B)	$     360,000.00	$     330,000.00	$     375,000.00
	Net Operating Income			(A-B)	$                     -	$       40,000.00	$     (90,000.00)

W.N.2
Year 1	($ 66 x 60000)				$ 3,960,000.00
Year 2	($ 64.60 x 50000)				$ 3,230,000.00
Year 3	($ 64.60 x 25000) + ($ 69.50 x 40000)				$ 4,395,000.00

Is this okay?