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:

Management is anxious to assess the profitability of the new camp cot during the month of May.

37,000 32,000 76 $ Beginning inventory Units produced Units sold Selling price per unit Selling and administrative expenses: Variable per unit Fixed (per month) Manufacturing costs: Direct materials cost per unit Direct labor cost per unit Variable manufacturing overhead cost per unit Fixed manufacturing overhead cost (per month) $ 569,000 $ 16 9 2 $ 703,000

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

1. Assuming that Company Using Absorption Costing: A 16.00 9.00 A a. Calculation of Unit Product Cost: Direct Materials Direct Labor Variable Manufacturing Overhead Fixed Manufacturing Overhead ($703000/37000) Total Unit Product Cost 2.00 A A 19.00 46.00 b. Preparation of Income Statement for May: Sales (32000 x $76) $ 2,432,000.00 Less: Cost of Goods Sold (32000 x $46) $ (1,472,000.00) Gross Profit $ 960,000.00 Less: Selling and Administrative Expense (32000x$4)+$569000 $ (697,000.00) Operating Income $ 263,000.00

2. Assuming that the company uses Variable Costing: A a. Calculation of Unit Product Cost: Direct Materials Direct Labor Variable Manufacturing Overhead 16.00 9.00 2.00 Total Unit Product Cost $ 27.00 b. Preparation of Contributed format Income Statement for May: Sales (32000 x $76) $ 2,432,000.00 Less: Cost of Goods Sold (32000 x $27) (864,000.00) Gross Contribution Margin $ 1,568,000.00 Less: Variable Selling and Administrative Expense (32000x$4) $ (128,000.00) Contribution Margin $ 1,440,000.00 Less: Fixed Manufacturing Overhead $ (703,000.00) Less: Fixed Selling and Administrative Expense $ (569,000.00 Operating Income $ 168,000.00