Question

6-18 Variable and Absorption Costing Unit Product Costs and Income Statements [LO6-1, Lo6- 2) factures and sells one product. The following information pertains to each of the company's fist hree years of operations Manufacturing: Direct materials Direct labor Variable manufacturing overhead 21 Variable selling and administrative Fixed costs per yeari s 330,000 s 150,000 Fixed manufacturing overhead Pixed selling and administrative expenses During its first year of operations, Haas produced 40,000 units and sold 40,000 units. During its second year of operations, it produced 55,000 units and sold 30,000 units. In its third year, Haas produced 20,000 units and sold 45.000 units. The selling price of the company's product is $52 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

Answer 1

Solution 1:

Total Fixed costs = 330,000 + 150,000 = $480,000

Contribution margin per unit = Sale price - Variable costs = $52 - ($21+$13+$4+$2) = $52 - $40 = $12 per unit

Break Even point in unit Sales = Total fixed Costs / Contribution margin per unit = $480,000 / $12 = 40,000 units

Solution 2-a:

Computation of Unit Product Cost - Variable Costing
Particulars	Year 1	Year 2	Year 3
Unit Product Cost:
Direct material	$21.00	$21.00	$21.00
Direct Labor	$13.00	$13.00	$13.00
Variable manufacturing overhead	$4.00	$4.00	$4.00
Unit product cost	$38.00	$38.00	$38.00

Solution 2-b:

Income Statement - Variable Costing - Haas Company
Particulars	Per Unit	Year 1	Year 2	Year 3
Sales	$52.00	$20,80,000.00	$15,60,000.00	$23,40,000.00
Variable Costs:
Variable manufacturing Costs	$38.00	$15,20,000.00	$11,40,000.00	$17,10,000.00
Variable Selling and administrative expenses	$2.00	$80,000.00	$60,000.00	$90,000.00
Total Variable Costs	$40.00	$16,00,000.00	$12,00,000.00	$18,00,000.00
Contribution Margin	$12.00	$4,80,000.00	$3,60,000.00	$5,40,000.00
Fixed Expenses:
Fixed manufacturing overhead		$3,30,000.00	$3,30,000.00	$3,30,000.00
Fixed Selling & Administrative Expenses		$1,50,000.00	$1,50,000.00	$1,50,000.00
Net Operating Income		$0.00	-$1,20,000.00	$60,000.00

Solution 3-a:

Computation of Unit Product Cost - Absorption Costing
Particulars	Year 1	Year 2	Year 3
Unit Product Cost:
Direct material	$21.00	$21.00	$21.00
Direct Labor	$13.00	$13.00	$13.00
Variable manufacturing overhead	$4.00	$4.00	$4.00
Fixed manufacturing overhead ($330,000 / Nos of unit produced)	$8.25	$6.00	$16.50
Unit Product Cost	$46.25	$44.00	$54.50

Solution 3-b:

Income Statement - Absorption Costing - Haas Company
Particulars	Year 1		Year 2		Year 3
	Details	Amount	Details	Amount	Details	Amount
Sales		$20,80,000.00		$15,60,000.00		$23,40,000.00
Cost of Goods Sold:
Cost of goods produced	$18,50,000.00		$24,20,000.00		$10,90,000.00
Less: Ending Inventory	$0.00		$11,00,000.00		$0.00
Add: Opening Inventory	$0.00	$18,50,000.00	$0.00	$13,20,000.00	$11,00,000.00	$21,90,000.00
Gross Profit		$2,30,000.00		$2,40,000.00		$1,50,000.00
Variable Selling & Administrative Expenses		$80,000.00		$60,000.00		$90,000.00
Fixed Selling & Administrative Expenses		$1,50,000.00		$1,50,000.00		$1,50,000.00
Net Operating Income		$0.00		$30,000.00		-$90,000.00