Question

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		41,000
Units sold		36,000
Selling price per unit		$85
Selling and administrative expenses:
Variable per unit		$4
Fixed per month	$	563,000
Manufacturing costs:
Direct materials cost per unit		$14
Direct labor cost per unit		$8
Variable manufacturing overhead cost per unit		$3
Fixed manufacturing overhead cost per month	$	697,000
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

Unit product cost

Prepare an income statement for May.

High Country, Inc,

Absorption Costing Income Statement

2. Assume that the company uses variable costing.

a. Determine the unit product cost. Unit product cost b. Prepare a contribution format income statement for May. High Country, Inc Variable Costing Income Statement

Answer 1

1) Absorption costing :

a) Unit product cost :

Direct material	14
Direct labour	8
Variable manufacturing overhead	3
Fixed manufacturing overhead (697000/41000)	17
Unit product cost	42

Income statement :

Sales (36000*85)	3060000
Cost of goods sold (36000*42)	-1512000
Gross profit	1548000
Selling and administrative expense (36000*4+563000)	-707000
Net operating income	841000

2) Variable costing :

a) Unit product cost :

Direct material	14
Direct labour	8
Variable manufacturing overhead	3
Unit product cost	25

Income statement :

Sales (36000*85)	3060000
Variable Cost of goods sold (36000*25)	-900000
Manufacturing margin	2160000
Variable selling and administrative expense (36000*4)	-144000
Contribution margin	2016000
Fixed manufacturing overhead	-697000
Fixed selling and administrative expense	-563000
Net operating income	756000