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	$	26
Direct labor	$	13
Variable manufacturing overhead	$	5
Variable selling and administrative	$	3
Fixed costs per year:
Fixed manufacturing overhead	$	450,000
Fixed selling and administrative expenses	$	210,000

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 $58 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.

Answer 1

Sol: Solution of different parts of problem is as follows :-

PART 1) Calculation of BEP (in units) = (Fixed cost) / (Contribution/unit)

Calculation of contribution per unit = (Sales - Variable costs) = ( $58 - $47) = $ 11/unit
BEP = ($ 660000 / $ 11) = 60000 units.

PART 2) (a) Computation of Unit product cost for Year 1, Year 2 & Year 3 as per variable costing :-

YEAR - 1 YEAR-2 YEAR-3 Amount ( in $) Amount (in $) Amount ( in $) Cost calculation for one unit using Variable costing Particular Direct material/unit Direct Labor/unit Variable overheards/unit Variable selling overheards/unit Total variable production cost/unit Number of units produced Total variable cost 60000 units 2820000 75000 units 3525000 40000 units 1880000

Explanation :- Under Variable costing system, all the variable costs are considered together, but variable selling expenses are computed only on units sold & not on all produced during the given period.

(b) Computation of income statement for Year 1, Year 2, and Year 3 as per Variable costing :-

Income statement using Variable Costing Particular Units sold Sales @ $58/unit) Variable production cost @44/unit) Variable selling expenses (@ 3/unit) Total Variable costs Contribution (Sales-Total Variable cost) Fixed costs:- Fixed prodution overheads Fixed selling expenses Net Profit/(Loss) YEAR-1 YEAR-2 YEAR-3 Amount (in $) Amount (in $) Amount (in $) Amount (in $) Amount (in $) Amount (in $) 60000 units 50000 units 65000 units 3480000 2900000 3770000 2640000 3300000 1 7600001 180000 150000 1 95000 2820000 3450000 1 955000 660000 -550000 1 815000 450000 210000 450000 210000 450000 210000 660000 o 660000 -1210000 660000 1155000

Explanation:- Under Variable costing system, variable production cost is calculated for whole production whereas variable selling expenses only on units sold.
Sales - total variable cost = Contribution & Contribution - Total fixed cost = Net Profit.

PART 3) (a) Computation of Unit product cost for Year 1, Year 2 & Year 3 as per Absorption costing :-

YEAR-1 YEAR-2 YEAR-3 Amount (in $) Amount (in $) Amount (in $) 261 13 26 13 Cost calculation for one unit using Absorption costing Particular Direct material/unit Direct Labor/unit Variable overhards/unit Total Fixed overheads Number of units produced Fixed cost / unit Absorption costing/unit 660000 60000 units 660000 75000 units 8.8/ 660000 40000 units 16.5 60.5 55 52.8

(b) Computation of income statement for Year 1, Year 2, and Year 3 as per Absorption costing :-

Explanation :- Cost of sales = Opening stock + Production cost - Closing stock.
The production cost & value of closing inventory is calculated on the basis of per unit cost of production determined in PART (a) above.
The fixed cost related to production is treated separately (as a part of Cost of sales) & all the selling expenses are deducted from Gross profit thereafter.

YEAR-1 YEAR-2 YEAR-3 Amount (in $) Amount (in $) Amount (in $) Amount (in $) Amount (in $) Amount (in %) 60000 units 50000 units 65000 units 3480000 2900000 3770000 Income statement using Absorption Costing Particular Units sold Sales (@$ 58/unit) Cost of sales:- Opening Inventory Add:- Production cost Less:- Closing Inventory Gross profit (Sales-Cost of Sales) Less: Variable selling expenses (@ 3/unit sold) Fixed selling expenses Net Profit/(Loss) 0 3300000 0 3 0 960000 1320000 1320000 2420000 0 3300000 180000 2640000 260000 3740000 30000 180000 210000 1500001 210000 195000 210000 3 90000 210000 360000 - 1000000 405000 -375000