Chapter 6 Problem One Your Company manufactures and sells one product. the selli

Question

Chapter 6 Problem One Your Company manufactures and sells one product. the selling price per unit is $80 per unit. The following pertains to the company's first year of operations in which it produced 40,000 and sold 35,000 units. Variable costs: Manufacturing: Direct materials Direct labor Variable manufacturing overhead Variable selling 960,000 560,000 80,000 140,000 Fixed Costs per year: Fixed manufacturing Fixed selling and administrative 840,000 490,000 Instructions: 1.Using the above information prepare an income statement in the traditional format. 2. Prepare an income statement in the contribution format. 3. Compute the unit cost under absorption costing. 4. Compute the unit cost under variable costing. 5. Compute the contribution margin per unit. 6. Compute the contribution margin ratio 7. There is a difference in the net income using one statement versus the other; explain the cause of the difference 8. Compute the breakeven sales in units 9. Compute the breakeven sales dollars.

Explanation / Answer

1.

income statement

sale 2800000

less:

direct material 960000

direct labour 560000

variable manf exp 80000

variable selling 140000

total variable expense (1740000)

fixed cost (1330000)

net income (270000)

2.

Sale 2800000

- variable cost (1522500)

contribution 1277500

fixed cost (1330000)

net income (52500)

3.

unit cost under absorption cost = (1740000+1330000)/40000 = 76.75

4.

unit cost under variable cost = (1522500)/35000 = 43.5

5.

contribution margin = 1277500/35000 = $36.5 per unit

6.

contribution ration = 1277500/2800000 = 45.63%

7.

the difference is because under absorption costing the total cost incurred is charged to the sale unit and under variable cost only variable cost is charged for the unit sold so the income is different in both cases.

8.

sales break even in units:

fixed cost / contribution per unit = 1330000/36.5 = 36438 units approx.

9.

break even sale in dollars = 36438*80 = $2915068

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