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		36,000
Units sold		31,000
Selling price per unit	$	79
Selling and administrative expenses:
Variable per unit	$	3
Fixed (per month)	$	563,000
Manufacturing costs:
Direct materials cost per unit	$	18
Direct labor cost per unit	$	9
Variable manufacturing overhead cost per unit	$	4
Fixed manufacturing overhead cost (per month)	$	720,000

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

absorption costing unit product cost
particular	amount
direct material	18
direct labour	9
variable manufacturing overhead	4
fixed manufacturing overhead (720,000 / 36,000)	20
Unit product cost	51

income statement (absorption costing)
particular	amount
sale ( 31,000 x 79)	24,49,000
less: cost of goods sold (31,000 x 51)	15,81,000
gross profit	8,68,000
less: variable and fixed selling and admin. Exp
variable (31,000 x 3)	93,000
fixed	5,63,000
net income	2,12,000

variable costing unit product cost
particular	amount
direct material	18
direct labour	9
variable manufacturing overhead	4
unit product cost	31

income statement (variable costing)
particular	amount
sale ( 31,000 x 79)	24,49,000
less: variable cost:
cost of goods sold (31,000 x 31)	9,61,000
selling and administrative expense (31,000 x 3)	93,000
contribution margin	13,95,000
less: fixed expense
manufacturing overhead	7,20,000
selling and administrative expense	5,63,000
net income	1,12,000