Question

Problem 7-20 Variable and Absorption Costing Unit Product Costs and Income Statements; Explanation of Difference in Net Operating Income

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		48,000
Units sold		43,000
Selling price per unit	$	80
Selling and administrative expenses:
Variable per unit	$	4
Fixed (per month)	$	563,000
Manufacturing costs:
Direct materials cost per unit	$	16
Direct labor cost per unit	$	9
Variable manufacturing overhead cost per unit	$	4
Fixed manufacturing overhead cost (per month)	$	912,000

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

Requirement: 1a High Country Unit Product cost using Absorption Costing Direct Material 16.00 Direct Labour 9.00 Variable Manufacturing Overhead Fixed Manufacturing Over head (912000/ 48000) 4.00 19.00 Unit Product cost 48.00 Requirement: 1b High Country Absorption Costing Income Statement Sales (43000 $80) Cost of Goods Sold Gross Margin 3440000 2064000 1376000 Selling and Administrative Overheads 735000 Operating Income or loss 641000

Requirement: 2a Unit Product cost using Variable Costing Direct Material Direct Labor Variable Overhead Cost per unit 16.00 9.00 4.00 29.00 Requirement: 2b Variable costing income statement Sales (43000* $80 Per unit) Variable Expense Variable cost of goods sold (@29) Variable Selling and Administrative Expense (@4) Total Varible Expenses Contribution Margin Fixed Expenses: Fixed manufacturing Overheads Fixed Sellingand Administrative Expenses Total fixed Expenses 3440000 1247000 172000 1419000 2021000 912000 563000 1475000 Net Operating Income 546000