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	$	24
Direct labor	$	16
Variable manufacturing overhead	$	7
Variable selling and administrative	$	2
Fixed costs per year:
Fixed manufacturing overhead	$	120,000
Fixed selling and administrative expenses	$	60,000

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 $52 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.

2B.

Haas Company Variable Costing Income Statement Year 1 Year 2 Year 3 Sales $3,120,000 $2,600,000 $3,380,000 Variable expenses: ? 2,820,000 ? ? ? ? ? ? ? ? ? ? Variable selling and administrative 120,000 100,000 130,000 Total variable expenses 2,940,000 100,000 130,000 Contribution margin 180,000 2,500,000 3,250,000 Fixed expenses: Fixed manufacturing overhead 120,000 120,000 120,000 Fixed selling and administrative 60,000 60,000 60,000 Total fixed expenses 180,000 180,000 180,000 Net operating income (loss) $0 $2,320,000 $3,070,000

Answer 1

Solution

Haas Company

1. Computation of the company’s break-even point in unit sales:

Break-even point in unit sales = fixed cost/unit contribution margin

Unit contribution margin = unit selling price – unit variable cost

Unit selling price = $52

Unit variable cost –

Direct materials          $24

Direct labor                 $16

Variable manufacturing overhead      $7

Variable selling overhead                   $2

Total variable cost                              $49

Contribution margin                           $3

Fixed cost –

Fixed manufacturing overhead           $120,000

Fixed selling overhead                       $60,000

Total fixed cost                                   $180,000

Break-even point in unit sales = $180,000/$3 = 60,000 units

2a. Assuming the company uses variable costing method:

• Determination of unit product cost for year 1, year 2 and year3:

Unit product cost –

Direct materials                            $24

Direct labor                                   $16

Variable manufacturing overhead $7

Total product cost                         $47

The unit product cost = $47

The unit product cost for year 1, year 2 and year 3 would remain same at $47.

The unit product cost does not include variable selling costs.

According to variable costing method, the unit cost of a product comprises all the direct costs of the number of units sold. The cost component does not include fixed overheads – both manufacturing and selling and administrative.

Hence, assuming variable costing method, the unit cost of the product for Year1, Year 2 and Year 3 is $42.

The number of units produced is also not considered.

The number of units sold is considered to arrive at the total direct costs and contribution.

2b. Income statement under variable costing method:

Haas Company
Income Statement under Variable Costing Method
	Year 1	Year2	Year 3
	60,000 units sold	50,000 units sold	65,000 units sold
Sales	$3,120,000	$2,600,000	$3,380,000
Variable cost of goods sold at $47 per unit	$2,820,000	$2,350,000	$3,055,000
Margin	$300,000	$250,000	$325,000
Variable selling expenses at $2 per unit	$120,000	$100,000	$130,000
Contribution Margin	$180,000	$150,000	$195,000
Fixed Manufacturing Overhead	$120,000	$120,000	$120,000
Fixed Selling Expenses	$60,000	$60,000	$60,000
Total fixed expenses	$180,000	$180,000	$180,000
Net Income	0	$(30,000)	$15,000

3a. unit product cost:

• Determination of unit product cost for year 1:

Unit product cost –

Direct materials                            $24

Direct labor                                   $16

Variable manufacturing overhead $7

Fixed manufacturing overhead     $2        ($120,000/60,000 units produced)

Total product cost                         $49

The unit product cost = $49

• Determination of unit product cost for year 2:

Unit product cost –

Direct materials                            $24

Direct labor                                   $16

Variable manufacturing overhead $7

Fixed manufacturing overhead     $1.60   ($120,000/75,000 units produced)

Total product cost                         $48.60

The unit product cost = $48.60

• Determination of unit product cost for year 3:

Unit product cost –

Direct materials                            $24

Direct labor                                   $16

Variable manufacturing overhead $7

Fixed manufacturing overhead     $3        ($120,000/40,000 units produced)

Total product cost                         $50

The unit product cost = $50

3b. Income statement as per absorption costing for Year 1, Year 2 and Year 3:

	Haas Company
	Income Statement under Absorption Costing
	Year 1	Year 2	Year 3
Sales in units	60,000	50,000	65,000
sales @52 per unit	$3,120,000	$2,600,000	$3,380,000
Beginning inventory	$0	$0	$1,215,000
Add: Cost of goods manufactured	$2,940,000	$3,645,000	$2,000,000
Cost of goods available for sale	$2,940,000	$3,645,000	$3,215,000
Less: closing inventory	$0	$1,215,000	$0
	$2,940,000	$2,430,000	$3,215,000
Gross Profit	$180,000	$170,000	$165,000
Less: marketing and administrative expenses:
variable overhead @$2 per unit	$120,000	$100,000	$130,000
Fixed overhead	$60,000	$60,000	$60,000
Net Income	$0	$10,000	($25,000)