Question

Problem 6-20 Variable and Absorption Costing Unit Product Costs and Income Statements; Explanation of Difference in Net Operating Income [LO6-1, LO6-2, LO6-3] 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 45,000 Units sold 40,000 Selling price per unit $ 75 Selling and administrative expenses: Variable per unit $ 3 Fixed (per month) $ 560,000 Manufacturing costs: Direct materials cost per unit $ 15 Direct labor cost per unit $ 7 Variable manufacturing overhead cost per unit $ 2 Fixed manufacturing overhead cost (per month) $ 900,000 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

Solution 1a:

Computation of Unit Product Cost - Absorption Costing
Particulars	Per unit
Unit Product Cost:
Variable manufacturing cost	$24.00
Fixed manufacturing overhead ($900,000 / 45000)	$20.00
Unit Product Cost	$44.00

Solution 1b:

High Country Inc.
Full Absorption income statement
Particulars	Details	Amount
Sales		$3,000,000.00
Cost of Goods Sold:
Cost of goods produced (45000*$44)	$1,980,000.00
Add: Opening Inventory	$0.00
Less: Ending Inventory (5000*$44)	$220,000.00	$1,760,000.00
Gross Profit		$1,240,000.00
Variable Selling & administrative expenses		$120,000.00
fixed Selling & administrative expenses		$560,000.00
Net Operating Income		$560,000.00

Solution 2a:

Computation of Unit Product Cost - Variable Costing
Particulars	Per unit
Unit Product Cost:
Direct material	$15.00
Direct Labor	$7.00
Variable manufacturing overhead	$2.00
Unit product cost	$24.00

Solution 2b:

High Country Inc.
Contribution margin income statement
Particulars	Per unit	Amount
Sales	$75.00	$3,000,000.00
5
Variable manufacturing cost	$24.00	$960,000.00
Variable Selling and administrative expenses	$3.00	$120,000.00
Contribution	$48.00	$1,920,000.00
Fixed Manufacturing Costs		$900,000.00
Fixed non manufactuirng costs		$560,000.00
Net Income		$460,000.00