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	$	18
Variable manufacturing overhead	$	6
Variable selling and administrative	$	3
Fixed costs per year:
Fixed manufacturing overhead	$	390,000
Fixed selling and administrative expenses	$	150,000

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 $62 per unit.

Required:

Compute the company’s break-even point in unit sales.

Assume the company uses variable costing:

Compute the unit product cost for Year 1, Year 2, and Year 3.

Prepare an income statement for Year 1, Year 2, and Year 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

Haas Company Requirement 1 Direct Material Direct Labor Variable Factory O/H Total Variable Cost per Unit CM per Unit = Seling price - Variable cost per unit = $62 - (26 + 18 + 6 + 3) = 9 Breakeven point Unit Sales - Fixed Cost / CM per unit = ( 390000 + 150000)/9 = 60000 Units Requirement 2 a) Compute the unit product cost for Year 1, Year 2, and Year 3 Product cost: Direct Material Direct Labor Variable Factory O/H Total Unit Cost 26 18 6 50 (no variable selling & expenses) We don't take into account the Fixed Manufacturing expenses in Variable Costing, so it is irrelevant Sales and all years will compute the same Unit Product Cost: Year 1 50 Year 2 50 Year 3 50 Unit Product Cost

b) Prepare an income statement for Year 1, Year 2, and Year 3 Year 2 Year 3 3100000 4030000 Variable Costing Income Statement Year 1 Sales 3720000 Variable expenses: Variable cost of goods sold 3000000 Variable selling and admin 180000 2500000 150000 3250000 195000 3180000 2650000 540000 450000 3445000 585000 Total Variable expense Contribution Margin Fixed expenses: Fixed Manufacturing Ohd. Fixed selling and admin 390000 150000 390000 150000 390000 150000 Total Fixed expenses Net Operating Income (loss) 540000 0 540000 -90000 540000 45000 Requirement 3 a) Compute the unit product cost for Year 1, Year 2, and Year 3. Year 1 Year 2 Year 3 18 18 6 Direct Material Direct Labor Variable Factory O/H Variable Product Cost Add: Fixed Factory O/H Absorb. Unit product cost 50 5.2 55.2 50 9.75 59.75 56.5 (390 000 / 60 000) (390000 / 75000) (390000 / 40000)

b) Prepare an income statement for Year 1, Year 2, and Year 3 Absorption Costing Income Statement Year 1 Year 2 Year 3 Sales 3720000 3100000 4030000 Cost of goods sold 3390000 2760000 3770000 Gross Margin 330000 340000 260000 Selling and Admin Costs 330000 300000 345000 Net Operating Income (loss) 0 40000 -85000 Cost of goods sold computations: Year 1: (60,000 units x $56.5 per unit) = $3,390,000 Year 2: (50,000 units x $55.2 per unit) = $2,760,000 Year 3: (25,000 x $55.2 per unit) + (40,000 x $59.75 per unit) = $3,770,000