Question

Quality Harvesters Co. is a farming corporation that grows and sells crops in the Midwest. The company is publicly traded on the stock market: however, management prefers to use variable costing for decision purposes.

The company reported the following financial information for the past month:

Number of truckloads produced	2,000 truckloads
Direct Materials	$700 per truckload
Direct Labor	$750 per truckload
Variable Manufacturing Overhead	$350 per truckload
Fixed Manufacturing Overhead	$1,200,000
Variable S&GA costs	$50 per truckload
Fixed S&GA costs	$700,000

Required

1. Compute the unit product cost under absorption costing. Show your work.
2. Compute the unit product cost under variable costing. Show your work.
3. If the selling price is $3,500 per truckload and in total 1,800 truckloads are sold, please calculate the profit or loss under the absorption costing.
4. If the selling price is $3,500 per truckload and in total 1,800 truckloads are sold, please calculate the profit or loss under the variable costing.
5. If next year the company plans to produce 2,000 truckloads and sell 2,200 truckloads, which costing method generates higher profit?
6. If the company has sufficient production capacity, currently it receives a special one-time order request from the state government. Because the state government is experiencing financial problems due to a tightened budget, the state is willing to pay only $2,000/truckload for the same product. Consider the company’s profit, will you accept the order from the government or not? Please provide reasons.

Answer 1

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Part 1
Unit product cost under absorption Costing:
Direct Material		$           700
Direct Labor		$           750
Variable Manufacturing overhead		$           350
Fixed Manufacturing overhead	$1,200,000/2,000	$           600
Unit Product Cost under absorption		$        2,400
Part 2
Unit product cost under variable Costing:
Direct Material		$           700
Direct Labor		$           750
Variable Manufacturing overhead		$           350
Unit Product Cost under variable		$        1,800
Part 3	Absorption
Selling Price	$3,500*1,800		$ 6,300,000
Less: Cost of good Sold	$2,400*1,800		$-4,320,000
Gross Margin			$ 1,980,000
Less: Selling and Admin Expenses
Variable	$50*1,800	$     90,000
Fixed		$   700,000	$   -790,000
Net Income			$ 1,190,000
Part 4	Variable
Selling Price	$3,500*1,800		$ 6,300,000
Less: Variable Cost
Cost of goods sold	$1,800*1,800	$3,240,000
Selling and Admin Expense	$50*1,800	$     90,000	$-3,330,000
Contribution Margin			$ 2,970,000
Less: Fixed Cost
Manufacturing Overhead		$1,200,000
Fixed		$   700,000	$-1,900,000
Net Income			$ 1,070,000
Part 5
Variable Costing will generate Higher profit since Fixed overeheads of 200 units has been deferred in Absorption for next year
Part 6
Should accept the order as $2,000 is higher than relevant cost given below:
Relevant Cost:
Direct Material		$           700
Direct Labor		$           750
Variable Manufacturing overhead		$           350
Variable Selling and admin expense		$             50
Total Relevant Cost		$        1,850