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Problem 7-18 Variable and Absorption Costing Unit Product Costs and Income Statements [LO7-1, LO7- 2] Haas Company manufactures and sells one product. The following information pertains to each of the companys first three years of operations: Variable costs per unit: Manufacturing: Direct materials Direct labor Variable manufacturing overhead 28 20 Variable selling and administrative Fixed costs per year: Fixed manufacturing overhead Fixed selling and administrative expenses 150,000 $ 210,000 During its first year of operations, Haas produced 60,000 units and sold 60,000 units. During its second year of operations, it produced 75,000 units and sold 50,000 units. In its third year, Haas produced 40,000 units and sold 65,000 units. The selling price of the companys product is $61 per unit. Required: 1. Compute the companys break-even point in unit sales. 2. Assume the company uses variable costing a. Compute the unit product cost for Year 1, Year 2, and Year 3. b. Prepare an income statement for Year 1, Year 2, and Year 3. 3. Assume the company uses absorption costing: a. Compute the unit product cost for Year 1, Year 2, and Year 3. b. Prepare an income statement for Year 1, Year 2, and Year 3.

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1. Break-even point (unit sales Calculation of Contributio Margin per unit: Sales price per unit Less: Variable Cost per unit Direct materials Direct labor Variable Manufacuturing overhead Variable selling and administrative Contribution margin per unit 61 28 20 4 6 Fixed Cost: Fixed Manufacturig Overhead Fixed Sellling and administrative Total fixed costs 210,000 150,000 360,000 Fixed Costs Contribution margin per unit 360,000/6 Break-even point (units) 60,000 units Break even unit sales 60,000 units 2.a) Unit Product Cost Year 1 Year 2 Year 3 Direct materials Direct labor Variable Manufacturing overhead Unit product cost 28 20 4 52 28 20 4 52 28 20 4 52

b. Prepare Income statement Year 1 Year 2 Year 3 50,000 65,000 Unit sold Sales revenue (b-ax61) Variable expenses: Direct material (ax 28) Direct labor (a x 20) Variable Manufacturing Overhead (ax 4) Variable Selling and Administrative (ax 3) Total Variable expenses (c) Contribution margin (d-a c) Fixed Expenses: Fixed Manufacturing Overhead Fixed Selling and Administrative Total Fixed Expenses (e Net Income (d-e) 60,000 3,660,000 3,050,0003 3,965,000 1,680,000 1,200,000 240,000 180,000 1,000,000 200,000 150,000 3,300,000 2,750,000 300,000 1,400,000 1,820,000 1,300,000 260,000 195,000 3,575,000 390,000 360,000 210,000 150,000 360,000 210,000 150,000 360,000 (60,000) 210,000 150,000 360,000 30,000

3. a) Year 1 Year 2 Year 3 Direct materials Direct labor Variable Manufacturing overhead Fixed Manufacturing overhead Total Unit Product cost 28.00 $28.00 28.00 20.00 4.00 5.25 54.80 $ 57.25 20.00 4.00 3.50 20.00 4.00 2.80 55.50 S Working Notes: Year 1 Year 2 Year 3 Fixed Manufacturing Overhead (a) Number of Units produced (b) Fixed Manufacturing Overhead per unit (a/b) $ 210,000210,000 210,000 40,000 2.805.25 60,000 75,000 3.50 bl Year 1 Year 2 Year 3 Sales revenue Less: Cost of goods sold Gross Profit Less: Selling and administrative expenses Net Income 3,660,000 3,330,000 330,000 330,000 3,050,000 3,965,000 2,740,000 3,660,000 305,000 345,000 (40,000) 310,000 300,000 10,000

Working Notes: Calculation of Cost of goods sold Year 1 Beginning Inventory Add: Units Produced (60,000 x 55.50) Total Units Available Less: Ending Inventory (60,000 60,000 Cost of goods sold Amount $ 3,330,000 3,330,000 3,330,000 Year 2 Beginning Invento Add: Units Produced (75,000 x $54.80) Total Units Available Less: Ending Inventory (75,000 50,000 x 54.80 Cost of goods sold S 4,110,000 4,110,000 1,370,000 2,740,000 Year 3 Beginning Invento Add: Units Produced (40,000 x $57.25) Total Units Available Less: Ending Inventory (25,000 +40,000 65,000 Cost of goods sold 1,370,000 2,290,000 3,660,000 3,660,000 Selling and administrative expenses Variable Fixed Total Selling and administrative expenses Year 1 Year 2 Year 3 180,000 150,000 330,000 150,000 150,000 300,000 195,000 150,000 345,000

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