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 $ 20 Direct labor $ 12 Variable manufacturing overhead $ 3 Variable selling and administrative $ 1 Fixed costs per year: Fixed manufacturing overhead $ 390,000 Fixed selling and administrative expenses $ 210,000 During its first year of operations, Haas produced 50,000 units and sold 50,000 units. During its second year of operations, it produced 65,000 units and sold 40,000 units. In its third year, Haas produced 30,000 units and sold 55,000 units. The selling price of the company’s product is $48 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

Solution 1:

Contribution margin per unit = $48 - (20+12+3+1) = $12 per unit

Break even point = Total fixed cost / Contribution margin per unit = (390000+210000) / $12 = 50,000 units

Solution 2a and b:

Computation of Unit Product Cost - Variable Costing
Particulars	Year 1	Year 2	Year 3
Unit Product Cost:
Direct material	$20.00	$20.00	$20.00
Direct Labor	$12.00	$12.00	$12.00
Variable manufacturing overhead	$3.00	$3.00	$3.00
Unit product cost	$35.00	$35.00	$35.00

Income Statement - Variable Costing - Haas Company
Particulars	Per Unit	Year 1	Year 2	Year 3
Sales	$48	$24,00,000	$19,20,000	$26,40,000
Variable Costs:
Variable manufacturing Costs	$35	$17,50,000	$14,00,000	$19,25,000
Variable Selling and administrative expenses	$1	$50,000	$40,000	$55,000
Total Variable Costs	$36	$18,00,000	$14,40,000	$19,80,000
Contribution Margin	$12	$6,00,000	$4,80,000	$6,60,000
Fixed Expenses:
Fixed manufacturing overhead		$3,90,000	$3,90,000	$3,90,000
Fixed Selling & Administrative Expenses		$2,10,000	$2,10,000	$2,10,000
Net Operating Income		$0	-$1,20,000	$60,000

Solution 3a and 3b:

Computation of Unit Product Cost - Absorption Costing
Particulars	Year 1	Year 2	Year 3
Unit Product Cost:
Direct material	$20.00	$20.00	$20.00
Direct Labor	$12.00	$12.00	$12.00
Variable manufacturing overhead	$3.00	$3.00	$3.00
Fixed manufacturing overhead ($390,000 / Nos of unit produced)	$7.80	$6.00	$13.00
Unit Product Cost	$42.80	$41.00	$48.00

Income Statement - Absorption Costing - Haas Company
Particulars	Year 1		Year 2		Year 3
	Details	Amount	Details	Amount	Details	Amount
Sales		$24,00,000		$19,20,000		$26,40,000
Cost of Goods Sold:
Cost of goods produced	$21,40,000		$26,65,000		$14,40,000
Less: Ending Inventory	$0		$10,25,000		$0
Add: Opening Inventory	$0	$21,40,000	$0	$16,40,000	$10,25,000	$24,65,000
Gross Profit		$2,60,000		$2,80,000		$1,75,000
Variable Selling & Administrative Expenses		$50,000		$40,000		$55,000
Fixed Selling & Administrative Expenses		$2,10,000		$2,10,000		$2,10,000
Net Operating Income		$0		$30,000		-$90,000