Question

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Problem 6-20 Variable and Absorption Costing Unit Product Costs and Income Statements; Explanation of Difference in Net Operating Income (L06-1, L06-2, L06-3] 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: 35,000 30,000 Beginning inventory Units produced Unico Bold Selling price per unit Selling and administrative expenses Variable per unit Fixed per month) Manufacturing COSTS: Direct materials COSL per unit Direct labor COSE per unit Variable manufacturing overhead COS per unit Fixed manufacturing overhead cost per month) $ 562,000 $ 595,000 Management is anxious to assess the profitability of the new camp cot during the month of May. 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. Complete this question by entering your answers in the table below. Reg 1A Reg 1B Reg 2A Req 2B Determine the unit product cost. Assume that the company uses absorption costing. Unit product cost

Answer 1

1	Under Absorption Costing
a.	Unit product cost:
	Direct Material		$               15
	Direct Labor		$                  7
	Variable Manufacturing overhead		$                  4
	Total Variable Cost		$               26
	Fixed Manufacturing overhead ($595000/35000)		$               17
	Unit product cost		$               43
b.	Absorption Costing Income Statement
	Sales(30000 X $82)		$ 24,60,000
Less:	Cost of Goods Sold
	Beginning Inventory	0
Add:	Cost of Goods manufactured (35000 X $43)	$ 15,05,000
	Goods available for sale	$ 15,05,000
Less:	Ending Inventory (5000 X $43)	$   2,15,000	$ 12,90,000
	Gross Margin		$ 11,70,000
Less:	Selling and Administrative expenses [(30000 X $4) + $562000]		$   6,82,000
	Net Operating Income		$   4,88,000
2	Under Variable Costing
a.	Unit product cost:
	Direct Material		$               15
	Direct Labor		$                  7
	Variable Manufacturing overhead		$                  4
	Unit product cost		$               26
b.	Variable Costing Income Statement
	Sales(30000 X $82)		$ 24,60,000
Less:	Variable expenses:
	Variable Cost of goods sold:
	Beginning Inventory	0
Add:	Variable Manufacturing Cost(35000 X $26)	$   9,10,000
	Goods available for sale	$   9,10,000
Less:	Ending Inventory (5000 X $26)	$   1,30,000
	Variable Cost of goods sold	$   7,80,000
Add:	Variable selling expenses (30000 X $4)	$   1,20,000	$   9,00,000
	Contribution margin		$ 15,60,000
Less:	Fixed Expenses:
	Fixed Manufacturing overhead	$   5,95,000
	Fixed Selling and Administrative expenses	$   5,62,000	$ 11,57,000
	Net operating Income		$   4,03,000