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		44,000
Units sold		39,000
Selling price per unit	$	82
Selling and administrative expenses:
Variable per unit	$	3
Fixed (per month)	$	555,000
Manufacturing costs:
Direct materials cost per unit	$	15
Direct labor cost per unit	$	9
Variable manufacturing overhead cost per unit	$	2
Fixed manufacturing overhead cost (per month)	$	880,000

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

1.a. Unit product cost   [Refer working note 1]	$46
1.b. Absorption costing - Income statement
High Country, Inc.
Absorption Costing Income Statement
Sales                                                  [Units sold x Unit selling price = 39,000 units x $82 per unit]	$3,198,000
Cost of goods Sold                             [Units sold x Unit product cost = 39,000 units x $46 per unit]	$1,794,000
Gross Margin                                    [Sales - Cost of goods sold = $3,198,000 - $1,794,000]	$1,404,000
Selling and administrative expenses   [Variable cost + Fixed cost = (39,000 units x $3 per unit) + $555,000]	$672,000
Net operating income                        [$1,404,000 - $672,000]	$732,000

.

.

2.a. Unit product cost   [Refer working note 2]	$26
2.b. Variable costing - Income statement
High Country, Inc.
Variable Costing Income Statement
Sales                                                  [Units sold x Unit selling price = 39,000 units x $82 per unit]		$3,198,000
Variable Expenses
Variable cost of goods sold           [Units sold x Unit product cost = 39,000 units x $26 per unit]	$1,014,000
Variable selling expenses              [39,000 units x $3 per unit]	$117,000
[$1,014,000 + $117,000]		$1,131,000
Contribution Margin           [Sales - Variable expenses = $3,198,000 - $1,131,000]		$2,067,000
Fixed expenses
Fixed manufacturing overhead	$880,000
Fixed selling and administrative expenses	$555,000
[$880,000 + $555,000]		$1,435,000
Net Operating Income [$2,067,000 - $1,435,000]		$632,000

.

.

Working note 1 - Computation of unit Product cost as per absorption costing
Direct material cost per unit	$15
Direct labor cost per unit	$9
Variable manufacturing overhead cost per unit	$2
Fixed manufacturing overhead cost per unit [Fixed manufacturing overhead cost ÷ Number of units produced = $880,000 ÷ 44,000 units]	$20
Unit Product cost           [$15 + $9 + $2 + $20]	$46

.

.

Working note 2 - Computation of unit Product cost as per variable costing
Direct material cost per unit	$15
Direct labor cost per unit	$9
Variable manufacturing overhead cost per unit	$2
Unit Product cost              [$15 + $9 + $2]	$26