Question

Haas Company manufactures and sells one product. The following information pertains to each of the company’s first three years of operations:

Variable costs per unit:
Manufacturing:
Direct materials	$	26
Direct labor	$	13
Variable manufacturing overhead	$	5
Variable selling and administrative	$	3
Fixed costs per year:
Fixed manufacturing overhead	$	450,000
Fixed selling and administrative expenses	$	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 company’s product is $58 per unit.

Required:

1. Compute the company’s 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.

Answer 1

Variable costs per unit:
Manufacturing:
Direct materials	$                  26.00
Direct labor	$                  13.00
Variable manufacturing overhead	$                    5.00
Variable selling and administrative	$                    3.00
Fixed costs per year:
Fixed manufacturing overhead	$       450,000.00
Fixed selling and administrative expenses	$       210,000.00
1. BREAK EVEN POINT
FIXED COST / CONTRIBUTION PER UNIT	= 660000/11	60000	UNITS
SALES PRICE		$                  58.00
LESS:VARIABLE EXPENSES
Direct materials	$                  26.00
Direct labor	$                  13.00
Variable manufacturing overhead	$                    5.00
Variable selling and administrative	$                    3.00	$                  47.00
CONTRIBUTION PER UNIT		$                  11.00
Fixed costs per year:
Fixed manufacturing overhead	$       450,000.00
Fixed selling and administrative expenses	$       210,000.00
	$       660,000.00
2. VARIABLE COSTING
UNIT COST
Direct materials	$                  26.00
Direct labor	$                  13.00
Variable manufacturing overhead	$                    5.00
Variable selling and administrative	$                    3.00
	$                  47.00
VARIABLE COSTING
PARTICULARS	YEAR 1	YEAR 2	YEAR 3
SALES UNIT	60,000	50000	65,000
Sales revenue	$          3,480,000	$          2,900,000	$          3,770,000
UNITS PRODUCED	60,000	75,000	40,000
Direct Materials	$          1,560,000	$          1,950,000	$          1,040,000
Direct Labor	$             780,000	$             975,000	$             520,000
Variable manufacturing overhead	$             300,000	$             375,000	$             200,000
Variable selling and administrative	$             180,000	$             225,000	$             120,000
Net income	$             660,000	$           (625,000)	$          1,890,000
Less:
Fixed manufacturing overhead	$       450,000.00	$       450,000.00	$       450,000.00
Fixed selling and administrative expenses	$       210,000.00	$       210,000.00	$       210,000.00
Operating income	$                         -	$       (1,285,000)	$          1,230,000
3. ABSORPTION COSTING
UNIT COST	YEAR 1	YEAR 2	YEAR 3
Direct materials	$                  26.00	$                  26.00	$                  26.00
Direct labor	$                  13.00	$                  13.00	$                  13.00
Variable manufacturing overhead	$                    5.00	$                    5.00	$                    5.00
Variable selling and administrative	$                    3.00	$                    3.00	$                    3.00
Fixed manufacturing overhead
450000/60000	$                    7.50	$                    6.00	$                  11.25
450000/75000
450000/40000
TOTAL COST	$                  54.50	$                  53.00	$                  58.25
PARTICULARS	YEAR 1	YEAR 2	YEAR 3
SALES UNIT	60,000	50000	65,000
Sales revenue	$          3,480,000	$          2,900,000	$          3,770,000
LESS: COST OF GOODS SOLD
Direct Materials	$          1,560,000	$          1,300,000	$          1,690,000
Direct Labor	$             780,000	$             650,000	$             845,000
Variable manufacturing overhead	$             300,000	$             250,000	$             325,000
Variable selling and administrative	$             180,000	$             150,000	$             195,000
Fixed manufacturing overhead	$             450,000	$             300,000	$             731,250
Net income	$             210,000	$             250,000	$             (16,250)
Less:
Fixed selling and administrative expenses	$       210,000.00	$       210,000.00	$       210,000.00
Operating income	$                         -	$                40,000	$           (226,250)

IN VARIABLE COSTING, THE COST OF GOODS SOLD IS CALCULATED ON THE BASIS OF UNITS PRODUCED.

IN ABSORPTION COSTING THE COST OF GOODS SOLD IS CALCULATED ON THE BASIS OF UNITS SOLD, COST OF GOODS SOLD INCLUDE THE FIXED MANUFACTURING COST.