Question

Problem 7-20 Variable and Absorption Costing Unit Product Costs and Income Statements; Explanation of Difference in Net Operating Income (LO7-1, LO7-2, LO7-3] 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: 39,000 34,000 Beginning inventory Units produced Units sold Selling price per unit Selling and administrative expenses: Variable per unit Fixed (per month) Manufacturing costs: Direct materials cost per unit Direct labor cost per unit Variable manufacturing overhead cost per unit Fixed manufacturing overhead cost (per month) mo OO $ 624,000 Management is anxious to assess the profitability of the new camp cot during the month of May.

Answer 1

Solution 1a:

Computation of Unit Product Cost - Absorption Costing
Direct material	$18
Direct Labor	$9
Variable manufacturing overhead	$4
Fixed manufacturing overhead ($624000/39000)	$16
Unit product cost	$47

Solution 1b:

High Country Inc.
Income Statement - Absorption Costing
Sales (34000*$78)		$26,52,000
Less: Cost of Goods sold (34000*$47)		$15,98,000
Gross Profit		$10,54,000
Less: Selling and admin. Expenses
Variable Selling and administrative expenses (34000*$3)	$1,02,000
Fixed Selling & Administrative Expenses	$5,59,000
		$6,61,000
Net Operating Income		$3,93,000

Solution 2a:

Computation of Unit Product Cost - Variable Costing
Direct material	$18.00
Direct Labor	$9.00
Variable manufacturing overhead	$4.00
Unit product cost	$31.00

Solution 2b:

High Country Inc.
Income Statement - Variable Costing
Sales (34000*$78)		$26,52,000
Variable Costs:
Variable manufacturing Costs (34000*$31)	$10,54,000
Variable Selling and administrative expenses (34000*$3)	$1,02,000
Total Variable Costs		$11,56,000
Contribution Margin		$14,96,000
Fixed Expenses:
Fixed manufacturing overhead	$6,24,000
Fixed Selling & Administrative Expenses	$5,59,000
Total Fixed costs		$11,83,000
Net Operating Income		$3,13,000