Question

Chuck Wagon Grills, Inc., makes a single product—a handmade specialty barbecue grill that it sells for $200. Data for last year’s operations follow:

Units in beginning inventory		0
Units produced		10,000
Units sold		8,800
Units in ending inventory		1,200
Variable costs per unit:
Direct materials	$	60
Direct labor		20
Variable manufacturing overhead		10
Variable selling and administrative		30
Total variable cost per unit	$	120
Fixed costs:
Fixed manufacturing overhead	$	160,000
Fixed selling and administrative		480,000
Total fixed costs	$	640,000

Required:

1. Assume that the company uses variable costing. Compute the unit product cost for one barbecue grill.

2. Assume that the company uses variable costing. Prepare a contribution format income statement for last year.

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

Answer 1

1) Unit Product Cost under Variable Costing System

	Per Unit
Direct Materials	$60
Direct Labor	$20
Variable Manufacturing Overhead	$10
Unit Product Cost	$90

Variable Selling and administrative cost is not a manufacturing cost. It relates to the Selling and Admin department. Hence not considered.

2) Contribution Format Income Statement

Variable Costing Contribution Format Income Statement
	Amount
Sales (8,800 Units x $200)	$1,760,000
Variable Expenses:
Variable Cost of Goods Manufactured ($90*10,000 Units produced)	$900,000
Less: Ending Inventory (1,200 Units x $90 Product Cost)	$108,000
Variable Cost of Goods Sold	$792,000
Manufacturing Margin	$968,000
Less: Variable Selling and Administrative expenses (8,800 Units x $30)	$264,000
Contribution Margin	$704,000
Fixed Expenses:
Fixed Manufacturing Costs	$160,000
Fixed selling and administrative expenses	$480,000
Total Fixed Costs	$640,000
Operating Income	$64,000

3) Break Even Point

Break Even Point in unit = Total Fixed Costs / Per Unit Contribution Margin

Unit Contribution Margin = Selling Price $200 – Total Variable Cost per unit Given $120 = $80

Break Even Point (in units) = 640,000 / 80 = 8,000 Units