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: 49,000 44.000 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) $ 559,000 $ 784,000 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. Prev 1 of 2 Next >

Answer 1

1.
a.
Under absorption costing product costs includes both fixed and variable manufacturing costs incurred by company.
Calculation of unit product costs
Direct material	$17.00
Direct labor	$8.00
Variable manufacturing	$2.00
Fixed manufacturing	$16.00	(784000/49000)
Unit product costs	$43.00
b.
Income statement for May is shown below
High Country Inc
Absorption costing income statement
Sales revenue	$3,344,000	44000*76
Less: Cost of goods sold	$1,892,000	44000*43
Gross margin	$1,452,000
Less: Selling and administrative expenses	$647,000	(2*44000)+559000
Operating income	$805,000
2.
Under variable costing product costs includes only variable manufacturing costs incurred by company.
Calculation of unit product costs
Direct material	$17.00
Direct labor	$8.00
Variable manufacturing	$2.00
Unit product costs	$27.00
b.
Contribution format income statement for May is shown below
High Country Inc
Variable costing Income statement
Sales revenue		$3,344,000	44000*76
Variable expenses:
Cost of goods sold	$1,188,000		44000*27
Selling and administrative expenses	$88,000		44000*2
Total variable expenses		$1,276,000
Contribution margin		$2,068,000
Fixed expenses
Fixed manufacturing overhead costs	$784,000
Selling and administrative expenses	$559,000
Total fixed expenses		$1,343,000
Operating income		$725,000