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: Beginning inventory 0 Units produced 47,000 Units sold 42,000 Selling price per unit $ 77 Selling and administrative expenses: Variable per unit $ 4 Fixed (per month) $ 565,000 Manufacturing costs: Direct materials cost per unit $ 18 Direct labor cost per unit $ 7 Variable manufacturing overhead cost per unit $ 3 Fixed manufacturing overhead cost (per month) $ 940,000 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.

Answer 1

1a)	Unit product cost under absorption costing
	Direct materials				18
	direct labor				7
	variable MOH				3
	Fixed MOH		(940,000/47,000)		20
	unit product cost				48	answer
1b)	Absorption costing income statement
	sales	(42000*77)			3234000
	cost of goods sold		(42000*48)		2016000
	Gross profit				1218000
	selling & administrative expense
	variable selling&adm expense			168000
	fixed selling & adm expense			565,000	733,000
	Net income				485,000
2a)	unit product cost under variable costing
	Direct materials				18
	direct labor				7
	variable MOH				3
	unit product cost under variable costing				28
2b)	Contribution format
	Sales				3234000
	less variable expense
	cost of goods sold			1176000
	selling and adm expense			168000	1344000
	Contribtution margin				1890000
	fixed expense
	fixed MOH			940,000
	Fixed selling & adm expense			565000	1,505,000
	Net income				385,000