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		42,000
Units sold		37,000
Selling price per unit	$	80
Selling and administrative expenses:
Variable per unit	$	2
Fixed (per month)	$	555,000
Manufacturing costs:
Direct materials cost per unit	$	16
Direct labor cost per unit	$	8
Variable manufacturing overhead cost per unit	$	3
Fixed manufacturing overhead cost (per month)	$	798,000

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 = $46

Explanation:

Fixed manufacturing o/h per unit = $798,000 / 42,000 = $19

Unit product cost under  absorption costing

= Direct materials per unit+ Direct labor per unit + Variable manufacturing o/h per unit + Fixed manufacturing o/h per unit  

= $16 + $8 + $3 + $19 = $46.

Answer 1 b .

High Country, Inc

Absorption Costing Income statement

	Amount($)
Sales ( 37,000 units * $80)	2,960,000
Cost of goods sold ( 37,000 units * $46)	1702,000
Gross profit	1,258,000
Selling and administrative expenses [( 37,000 units * $2) + $555,000]	629,000
Net operating income	$629,000

Answer 2 a.

Unit product cost under variable costing = $27

Explanation:

Unit product cost under variable costing

= Direct materials per unit+ Direct labor per unit + Variable manufacturing o/h per unit   

= $16 + $8 + $3 = $27.

Answer 2 b .

High Country, Inc

Variable Costing Income statement

	Cost per unit	Amount ($)
Sales	80	2,960,000
Variable expenses:
Variable cost of goods sold	27	999,000
Variable selling and administrative expenses	2	74,000
Contribution margin		1,887,000
Fixed expenses
Fixed manufacturing overhead		798,000
Fixed selling and administrative expenses		555,000
Net operating income		$534,000