Haas Company manufactures and sells one product. The following information perta
ID: 2460599 • Letter: H
Question
Haas Company manufactures and sells one product. The following information pertains to each of the company’s first three years of operations: Variable costs per unit: Manufacturing: Direct materials $25 Direct labor $16 Variable manufacturing overhead $5 Variable selling and administrative $2 Fixed costs per year: Fixed manufacturing overhead $ 300,000 Fixed selling and administrative expenses $ 180,000 During its first year of operations, Haas produced 60,000 units and sold 60,000 units. During its second year of operations, it produced 75,000 units and sold 50,000 units. In its third year, Haas produced 40,000 units and sold 65,000 units. The selling price of the company’s product is $56 per unit. Required: 1. Compute the company’s break-even point in units sold. 2. Assume the company uses variable costing: a. Compute the unit product cost for year 1, year 2, and year 3 Prepare an income statement for year 1, year 2, and year 3.3. Assume the company uses absorption costing: a. Compute the unit product cost for year 1, year 2, and year 3. (Round your intermediate and final answers to 2 decimal places.) b. Prepare an income statement for year 1, year 2, and year 3. (Round your intermediate calculations to 2 decimal places.)
Explanation / Answer
Solution:
1. Calculation of Break-Even Point in Units Sold.
Break Even Point in Unit = Total Fixed Cost / Contribution Per Unit = $480,000 / $8 = 60,000 Units
Contribution Per Unit = Sales - Total Variable Cost = $56 - ($25+16+5+2) = $8
2a. Calculation of Unit Product Cost
Unit Product Cost = Total Variable Cost of Manufacturing / Units Produced during the year
Year 1 = $2,760,000 / 60,000 = $46 Per Unit
Year 2 = $3,450,000 / 75,000 = $46 PerUnit
Year 3 = $1,840,000 / 40,000 = $46 Per Unit
2b) Income Statement for Year 1, Year 2 and year 3 (Using Variable Costing)
Income Statement
Variable Costing
$ Per Unit
Year 1
Year 2
Year 3
Sales Value
$56
$3,360,000
$2,800,000
$3,640,000
Production Cost
Direct Material
$25
$1,500,000
$1,875,000
$1,000,000
Direct Labor
$16
$960,000
$1,200,000
$640,000
Variable Manufacturing Overhead
$5
$300,000
$375,000
$200,000
Cost of Goods Manufactured
$2,760,000
$3,450,000
$1,840,000
Beginning Inventory
$0
$0
$1,150,000
Cost of Goods available for sale
$2,760,000
$3,450,000
$2,990,000
Less: Ending Inventory (Value at current variable cost of goods manufactured)
$0
-$1,150,000
$0
Cost of Goods Sold
$2,760,000
$2,300,000
$2,990,000
Variable Selling Expenses
$2
$120,000
$100,000
$130,000
Total Variable Cost
$2,880,000
$2,400,000
$3,120,000
Contribution Margin (Sales - Total Variable Cost)
$480,000
$400,000
$520,000
Fixed Manufacturing Overhead
$300,000
$300,000
$300,000
Fixed Selling & Administrative Expenses
$180,000
$180,000
$180,000
Total Fixed Cost
$480,000
$480,000
$480,000
Profit (Contribution - Total Fixed Cost)
$0
-$80,000
$40,000
Working Note 1 --- Ending Inventory under Variable Costing System is valued at current variable cost of manufacturing goods.
WN - 2:
Year 1
Year 2
Year 3
Produced Units
60,000
75,000
40,000
Sales Unit
60,000
50,000
65,000
Beginning Inventory
0
0
25,000
Ending Inventory
0
25,000
0
3a) Calculation of Unit Product Cost under absorption Costing
Under Absorption Costing Unit Product cost includes total cost of manufacturing goods (variable + fixed manufacturing cost)
$ per Unit
Year 1
Year 2
Year 3
Produced Units
60,000
75,000
40,000
Sales Unit
60,000
50,000
65,000
Beginning Inventory
0
0
25,000
Ending Inventory
0
25,000
0
Sales Value
$56
$3,360,000
$2,800,000
$3,640,000
Production Cost
Direct Material
$25
$1,500,000
$1,875,000
$1,000,000
Direct Labor
$16
$960,000
$1,200,000
$640,000
Variable Manufacturing Overhead
$5
$300,000
$375,000
$200,000
Fixed Manufacturing Overhead
$300,000
$300,000
$300,000
Cost of Goods Manufactured
$3,060,000
$3,750,000
$2,140,000
Unit Product Cost = Cost of Goods Manufactured / Unit Produced
$51.00
$50.00
$53.50
3B) Income Statement (Absorption Costing)
Income Statement
Absorption Costing
$ per unit
Year 1
Year 2
Year 3
Sales Value
$56
$3,360,000
$2,800,000
$3,640,000
Production Cost
Direct Material
$25
$1,500,000
$1,875,000
$1,000,000
Direct Labor
$16
$960,000
$1,200,000
$640,000
Variable Manufacturing Overhead
$5
$300,000
$375,000
$200,000
Fixed Manufacturing Overhead
$300,000
$300,000
$300,000
Cost of Goods Manufactured
$3,060,000
$3,750,000
$2,140,000
Add: Beginning Inventory
$0
$0
$1,250,000
Less: Ending Inventory (Value at current total manufacturing cost)
$0
($1,250,000)
$0
Cost of Goods Sold
$3,060,000
$2,500,000
$3,390,000
Gross Profit (Sales - Cost of Goods Sold)
$300,000
$300,000
$250,000
Variable Selling Expenses
$2
$120,000
$100,000
$130,000
Fixed Selling & Administrative Expenses
$180,000
$180,000
$180,000
Total Selling & Administrative Expenses
$300,000
$280,000
$310,000
Contribution Margin (Sales - Total Selling & Admn Expenses)
$0
$20,000
($60,000)
Note: Under Absorption Costing Ending Inventory is valued at total current manufacturing cost (Variable + Fixed)
Income Statement
Variable Costing
$ Per Unit
Year 1
Year 2
Year 3
Sales Value
$56
$3,360,000
$2,800,000
$3,640,000
Production Cost
Direct Material
$25
$1,500,000
$1,875,000
$1,000,000
Direct Labor
$16
$960,000
$1,200,000
$640,000
Variable Manufacturing Overhead
$5
$300,000
$375,000
$200,000
Cost of Goods Manufactured
$2,760,000
$3,450,000
$1,840,000
Beginning Inventory
$0
$0
$1,150,000
Cost of Goods available for sale
$2,760,000
$3,450,000
$2,990,000
Less: Ending Inventory (Value at current variable cost of goods manufactured)
$0
-$1,150,000
$0
Cost of Goods Sold
$2,760,000
$2,300,000
$2,990,000
Variable Selling Expenses
$2
$120,000
$100,000
$130,000
Total Variable Cost
$2,880,000
$2,400,000
$3,120,000
Contribution Margin (Sales - Total Variable Cost)
$480,000
$400,000
$520,000
Fixed Manufacturing Overhead
$300,000
$300,000
$300,000
Fixed Selling & Administrative Expenses
$180,000
$180,000
$180,000
Total Fixed Cost
$480,000
$480,000
$480,000
Profit (Contribution - Total Fixed Cost)
$0
-$80,000
$40,000
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