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		37,000
Units sold		32,000
Selling price per unit	$	79
Selling and administrative expenses:
Variable per unit	$	2
Fixed (per month)	$	563,000
Manufacturing costs:
Direct materials cost per unit	$	15
Direct labor cost per unit	$	9
Variable manufacturing overhead cost per unit	$	3
Fixed manufacturing overhead cost (per month)	$	703,000

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

Answer:-1-a)-Unit product cost under Absorption costing:-Direct materials + Direct Labor+ Variable manufacturing overhead + fixed manufacturing overhead

=$15+$9+$3+$19

= $46 per unit

Explanation:- Unit fixed manufacturing overhead= fixed manufacturing overhead/No. of units produced

=$703000/37000 units

=$19 per unit

1-b)-

High Country Inc.
Income statement (Using absorption costing approach)
Particulars			Amount
			$
Sales (a)	32000 units*$79 per unit		2528000
Less:- Cost of goods sold (b)
Opening inventory
Add:-Cost of goods manufactured		1702000
Direct materials	37000 units*$15 per unit	555000
Direct labor	37000 units*$9 per unit	333000
Variable manufacturing overhead	37000 units*$3 per unit	111000
Fixed manufacturing overhead		703000
Cost of goods available for sale		1702000
Less:- Closing inventory	5000 units*$46 per unit	230000	1472000
Gross margin C= a-b			1056000
Less:-Variable selling & administrative exp.	32000 units*$2 per unit		64000
			992000
Less:- Fixed costs
Selling & administrative exp.			563000
Net Income			429000

2-a)-Unit product cost under Variable costing:-Direct materials + Direct Labor+ Variable manufacturing overhead

=$15+$9+$3

= $27 per unit

2-b)-

High Country Inc.
Income statement (Using variable costing approach)
Particulars			Amount
			$
Sales (a)	32000 units*$79 per unit		2528000
Less:- Variable cost of goods sold (b)
Opening inventory		NIL
Add:- Variable cost of goods manufactured		999000
Direct materials	37000 units*$15 per unit	555000
Direct labor	37000 units*$9 per unit	333000
Variable manufacturing overhead	37000 units*$3 per unit	111000
Variable cost of goods available for sale		999000
Less:- Closing inventory	5000 units*$27 per unit	135000	864000
Gross contribution margin C= a-b			1664000
Less:-Variable selling & administrative exp.	32000 units*$2 per unit		64000
Contribution margin			1600000
Less:- Fixed costs
Manufacturing overhead			703000
Selling & administrative exp.			563000
Net Income			334000