Question

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Hammock Manufacturing manufactures a single product that it will sell for $74 per unit. The company is looking to project its operating income for its first two years of operations. Cost information for the single unit of its product is as follows During its first year of operations, the company plans to manufacture 24,000 units and anicipates selling 22.000 of those units. During the second year of its operations, the company plans to manufacture 24,000 units and anticipates selling 25.000 units (t has units in beginning inventory for the second year from its first year of operations) Read the requirements (Click the lcon to view the data.) Requirement 1. Prepare an absorption costing income statement for (a) the first year of operations and (b) the second year of operations Hammock Manuftacturing Income Statement (Absorption Costing) (a) Year 1 (b) Year 2 Sales revenue 1628000 Cost of goods sold Less: Gross profi Less Operating expenses Operating income

Answer 1

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Part 1
Absorption Costing
	Year 1	Year 2
Units sold	22,000	25,000
Direct material	$            31.00	$                                                          31.00
Direct labor	$            10.00	$                                                          10.00
Variable MOH	$              4.00	$                                                            4.00
Fixed MOH per unit ($384,000 ÷24,000 units produced)	$            16.00	$                                                          16.00
Cost per unit	$            61.00	$                                                          61.00
	Year 1	Year 2
Sales revenue
22,000 X $74	$   1,628,000
25,000 X $74		$                                                  1,850,000
Less: Cost of Goods Sold (22,000 and 25,000 x $11)	$   1,342,000	$                                                  1,525,000
Gross profit	$       286,000	$                                                     325,000
Less: Operating expenses [$82,000 + (22,000 x $2)]; [$82,000 + (25,000 x $2)]	$       126,000	$                                                     132,000
Operating income	$       160,000	$                                                     193,000
Part 2
	Year 1	Year 2
Fixed MOH cost per unit	$                  16	$                                                                16
Change in inventory (in units)	$            2,000	$                                                        (1,000)
Difference in operating income	$         32,000	$                                                     (16,000)	a
Predicted operating income using variable costing	$       128,000	$                                                     209,000	a-Operating income in part 1
Part 3
Variable Costing	Year 1	Year 2
Direct Material	$                  31	$                                                                31
Direct Labor	$                  10	$                                                                10
Variable MOH	$                    4	$                                                                  4
Cost per unit	$                  45	$                                                                45
	Year 1	Year 2
Sales revenue
22,000 X $74	$   1,628,000
25,000 X $74		$                                                  1,850,000
Less Variable Expenses:
Variable Cost of Goods Sold (22,000 and 25,000 x $45)	$       990,000	$                                                  1,125,000
Variable Operating Expenses   (22,000 and 25,000 x $2)	$         44,000	$                                                        50,000
Contribution Margin	$       594,000	$                                                     675,000
Less Fixed Expenses:
Fixed MOH	$       384,000	$                                                     384,000
Fixed Operating Expenses	$         82,000	$                                                        82,000
Operating Income	$       128,000	$                                                     209,000