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.

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		46,000
Units sold		41,000
Selling price per unit		$82
Selling and administrative expenses:
Variable per unit		$4
Fixed per month	$	555,000
Manufacturing costs:
Direct materials cost per unit		$17
Direct labor cost per unit		$9
Variable manufacturing overhead cost per unit		$2
Fixed manufacturing overhead cost per month	$	828,000

 

Management is anxious to see how profitable the new camp cot will be and has asked that an income statement be prepared for May.

 

Required:

1.	Assume that the company uses absorption costing.

 

a.	Determine the unit product cost.

Explanation:

1-a.
The unit product cost under absorption costing is:
  

Direct materials	$	17
Direct labor		9
Variable manufacturing overhead		2
Fixed manufacturing overhead (828,000 ÷ 46,000 units)		18
Absorption costing unit product cost	$	46

 
b.

Sales (41,000 units × $82 per unit) = $3,362,000

Cost of goods sold (41,000 units × $46 per unit) = $1,886,000

Selling and administrative expenses (41,000 units × $4 per unit) + $555,000 = $719,000

 
2-a.
The unit product cost under variable costing is:
  

Direct materials	$	17
Direct labor		9
Variable manufacturing overhead		2
Variable costing unit product cost	$	28

  
b.

Sales (41,000 units × $82 per unit) = $3,362,000

Variable cost of goods sold (41,000 units × $28 per unit) = $1,148,000

Variable selling expense (41,000 units × $4 per unit) = $164,000

CompuDesk, Inc., makes an oak desk specially designed for personal computers.

CompuDesk, Inc., makes an oak desk specially designed for personal computers. The desk sells for $200. Data for last year’s operations follow:

Units in beginning inventory		0
Units produced		10,000
Units sold		9,000
Units in ending inventory		1,000
Variable costs per unit:
Direct materials		$  60
Direct labor		30
Variable manufacturing overhead		10
Variable selling and administrative		20
Total variable cost per unit		$ 120
Fixed costs:
Fixed manufacturing overhead	$	300,000
Fixed selling and administrative		450,000
Total fixed costs	$	750,000

Required:

1.	Assume that the company uses variable costing. Compute the unit product cost for one computer desk. (Omit the "$" sign in your response.)

Unit product cost

$ 100

2.	Assume that the company uses variable costing. Prepare a contribution format income statement for the year. (Input all amounts as positive values except losses which should be indicated by a minus sign. Omit the "$" sign in your response.)

Variable Costing Income Statement
Sales		$ 1,800,000
Variable expenses:
Variable cost of goods sold	$
Variable selling and administrative expenses		1,080,000
Contribution margin		720,000
Fixed expenses:
Fixed selling and administrative expenses
Fixed manufacturing overhead		750,000
Net operating income (loss)		$ -30,000

3.	What is the company’s break-even point in terms of units sold?

Break-even point

n/r

units

Maxwell Company manufactures and sells a single product. The following costs were incurred during

Maxwell Company manufactures and sells a single product. The following costs were incurred during the company’s first year of operations:

  

Variable costs per unit:
Manufacturing:
Direct materials		$ 18
Direct labor		$ 7
Variable manufacturing overhead		$ 2
Variable selling and administrative		$ 2
Fixed costs per year:
Fixed manufacturing overhead	$ 200,000
Fixed selling and administrative expenses	$ 110,000

  

During the year, the company produced 20,000 units and sold 16,000 units. The selling price of the company’s product is $50 per unit.

  

Required:

1.	Assume that the company uses absorption costing:

  

a.	Compute the unit product cost. (Omit the "$" sign in your response.)

  

Unit product cost

$ 37

  

b.	Prepare an income statement for the year. (Input all amounts as positive values except losses which should be indicated by a minus sign. Omit the "$" sign in your response.)

  

Absorption Costing Income Statement
Sales	$ 800,000
Cost of goods sold	592,000
Gross margin	208,000
Selling and administrative expenses	142,000
Net operating income (loss)	$ 66,000

  

2.	Assume that the company uses variable costing:

  

a.	Compute the unit product cost. (Omit the "$" sign in your response.)

  

Unit product cost

$ 27

  

b.	Prepare an income statement for the year. (Input all amounts as positive values except losses which should be indicated by a minus sign. Omit the "$" sign in your response.)

  

Variable Costing Income Statement
Sales		$ 800,000
Less: Variable expenses
Variable selling expense	$
Variable cost of goods sold		464,000
Contribution margin		336,000
Less: Fixed expenses
Fixed manufacturing overhead
Fixed selling and administrative expenses		310,000
Net operating income (loss)		$ 26,000

  

3.

The company’s controller believes that the company should have set last year’s selling price at $51 instead of $50 per unit. She estimates the company could have sold 15,000 units at a price of $51 per unit, thereby increasing the company’s gross margin by $2,000 and its net operating income by $4,000.

  

a.	Do you think the absorption costing approach is the proper way to assess the merits of the proposed price increase?
	No

b.	Do you think the variable costing approach is the proper way to assess the merits of the proposed price increase?
	Yes

c.	Using the variable costing approach, by how much will profits increase or decrease if the price increase in implemented?

Decrease by

$ n/r