High Country, Inc., produces and sells many recreational products. The company h

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:

Management is anxious to see how profitable the new camp cot will be and has asked that an income statement be prepared for May.

1. Assume that the company uses absorption costing.

a. Determine the unit product cost.

b. Prepare an income statement for May.

2. Assume that the company uses variable costing.

a. Determine the unit product cost.

b. Prepare a contribution format income statement for May.

Beginning Inventory 0 Units Produced 45,000 Units Sold 40,000 Selling Price Per Unit $81 Selling & Administrative Expenses: Variable per unit $3 Fixed per month $566,000 Manufacturing Costs: Direct materials cost per unit $17 Direct labor cost per unit $6 Variable manufacturing overhead cost per unit $2 Fixed manufacturing overhead cost per month $855,000

Explanation / Answer

1. Assume that the company uses absorption costing:

a. the unit product cost = $17 + $6 + $2 + (855000 / 45000) = $44 per unit

b. An income statement for May:

270000

2. Assume that the company uses variable costing.

a. the unit product cost = $17 + $6 + $2 = $25 per unit

b. A contribution format income statement for May:

240000

Manufacturing costs: Direct Material costs (45000 * 17) $765000 Direct Labor Costs (45000 * 6)

270000

Variable manufacturing overhead costs 90000 fixed manufacturing overhead costs 855000 Total Manufacturing Costs (45000 units) 1980000 Manufacturing costs for 40000 units $1760000 Add: Administrative and Selling costs: Variable costs (3 * 40000) 120000 Fixed costs 566000 Total Costs of Goods Sold $2446000 Add: Operating Income (Balancing Figure) $794000 Sales Revenue ($81 * 40000) $3240000

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