Question

Waterloo Storage Products makes a four-drawer plastic storage cabinet on casters meant for use in garages and workshops. Each cabinet sells for $37. Data for last year's operations follow: Units in beginning inventory Units produced Units sold Units in ending inventory 22,000 20,000 2,000 Variable costs per unit: Direct materials Direct labour Variable manufacturing overhead Variable selling and administrative 2 4. Total variable cost per unit $ 24 $ 82,500 Fixed costs: Fixed manufacturing overhead Fixed selling and administrative 117,500 Total fixed costs $200,000 Required: 1. Assume that the company uses variable costing. Compute the unit product cost for one storage cabinet.

Answer 1

Unit product cost                [Refer working note 1]	$20
Variable Costing Income Statement
Sales                           [Units sold x Unit selling price = 20,000 units x $37 per unit]		$740,000
Variable expenses:
Variable cost of goods sold:
Beginning inventory	$0
Add: Variable manufacturing costs            [Refer working note 2]	$440,000
Goods available for sale                            [$0 + $440,000]	$440,000
Less: Ending Inventory                               [Refer working note 3]	$40,000
Variable cost of goods sold	$400,000
Variable selling and administrative                 [20,000 units x $4 per unit]	$80,000	$480,000
Contribution Margin                                           [$740,000 - $480,000]		$260,000
Fixed expenses
Fixed manufacturing overhead	$82,500
Fixed selling and Administrative	$117,500
[$82,500 + $117,500]		$200,000
Operating profit                                                  [$260,000 - $200,000]		$60,000
Break even point [Refer working note 4]	15,385	units

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Working note 1 - Computation of unit product cost under variable costing
Direct material cost per unit                                 (a)	$8
Direct labor cost per unit                                      (b)	$10
Variable manufacturing overhead per unit              (c)	$2
Unit product cost                                                (a + b + c)	$20

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Working note 2 - Computation of value of variable manufacturing cost
Unit product cost       [Refer working note 1]        (a)	$20
Number of units produced                                         (b)	22,000
Variable manufacturing cost                                    (a x b)	$440,000

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Working note 3 - Computation of value of ending inventory
Unit product cost       [Refer working note 1]         (a)	$20
Units in ending inventory                                        (b)	2,000
Value of ending inventory                                       (a x b)	$40,000

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Working note 4 Total fixed cost = $200,000 Contribution margin per unit = Selling Price per unit - Variable cost per unit = $37 - $24 = $13 Fixed cost Break-even point (in units) => Contribution margin per unit $200,000 $13 = 15,384.61538 = 15,385 rounded to nearest whole number