Haas Company manufactures and sells one product. The following information perta
ID: 2469574 • 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:
During its first year of operations, Haas produced 40,000 units and sold 40,000 units. During its second year of operations, it produced 55,000 units and sold 30,000 units. In its third year, Haas produced 20,000 units and sold 45,000 units. The selling price of the company’s product is $46 per unit.
Required:
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.
Compute the unit product cost for year 1, year 2, and year 3. (Round your intermediate and final answers to 2 decimal places.)
Prepare an income statement for year 1, year 2, and year 3. (Round your intermediate calculations to 2 decimal places.)
Haas Company manufactures and sells one product. The following information pertains to each of the company’s first three years of operations:
Explanation / Answer
Solution:
1) Calculation of Break Even Point in Units Sold
Break Even Point in units = Fixed Costs / Contribution Margin Per Unit
Fixed Cost = Fixed manufacturing overhead + Fixed selling and administrative expenses = $110,000 + $50,000 = $160,000
Contribution Margin Per Unit = Selling Price Per Unit – Total Variable Cost Per Unit = $46 – ($20 + $12 + $7 + $3) = $46 - $42 = $4
Break Even Point in units = $160,000 / $4 = 40,000 Units
2)
Some interesting information about variable costing :--
Under Variable Costing, the variable costs as direct material, direct labor and variable manufacturing overheads are treated as the cost of product. The value of finished goods and work–in–progress is also comprised only of variable costs. Variable selling and distribution are excluded for valuing these inventories. Fixed costs are not considered for valuation of closing stock of finished goods and closing WIP. Fixed costs are treated as period costs and are charged to profit and loss account for the period for which they are incurred.
(a) Calculation of the unit product cost for year 1, year 2, and year 3
Year 1
Year 2
Year 3
Total Variable Cost Per Unit:
Direct materials
$20
$20
$20
Direct labor
$12
$12
$12
Variable manufacturing overhead
$7
$7
$7
Total Variable Cost Per Unit
$39
$39
$39
Under Variable Costing, Total Variable Cost is the Production Cost.
(b) Income Statement for year 1, year 2, and year 3
Income Statement (Variable Costing)
Year 1
Year 2
Year 3
Sale Value
$1,840,000
$1,380,000
$2,070,000
Total Variable Production Cost
Direct materials
$800,000
$1,100,000
$400,000
Direct labor
$480,000
$660,000
$240,000
Variable manufacturing overhead
$280,000
$385,000
$140,000
Variable Production Cost
$1,560,000
$2,145,000
$780,000
Add: Beginning Inventory (Valued at previous production cost)
$0
$0
$975,000
Less: Ending Inventory (Valued at current production cost) (Note 1)
$0
($975,000)
$0
Cost of Goods Sold
$1,560,000
$1,170,000
$1,755,000
Add: Variable selling and administrative
$120,000
$90,000
$135,000
Total Variable Cost
$1,680,000
$1,260,000
$1,890,000
Contribution Margin (Sale Value - Total Variable Cost)
$160,000
$120,000
$180,000
Fixed Expenses
Fixed manufacturing overhead
$110,000
$110,000
$110,000
Fixed selling and administrative expenses
$50,000
$50,000
$50,000
Total Fixed Costs
$160,000
$160,000
$160,000
Operating Profit (Contribution - Total Fixed Cost)
$0
($40,000)
$20,000
Note 1: Ending Inventory of Year 2 = (55,000 – 30,000) x $2,145,000 / 55,000 = $975,000
3)
Under Absorption Costing, Fixed Manufacturing Overheads are treated as Product Cost and are also included while valuation of ending inventory
(a) Calculation of the unit product cost for year 1, year 2, and year 3 (Absorption Costing)
Year 1
Year 2
Year 3
Total Variable Cost Per Unit:
Direct materials
$20
$20
$20
Direct labor
$12
$12
$12
Variable manufacturing overhead
$7
$7
$7
Total Variable Manufacturing Cost Per Unit
$39
$39
$39
Fixed Manufacturing Cost Per Unit
Units Produced
40,000
55,000
20,000
Total Fixed Manufacturing Cost
$110,000
$110,000
$110,000
Fixed Manufacturing Cost Per Unit (Total Cost / Units Produced)
$2.75
$2.00
$5.50
Product Cost Per unit (Variable + Fixed Per Unit Cost)
$41.75
$41.00
$44.50
(b) Please ask separate question --- as it involve lot of calculations.
Year 1
Year 2
Year 3
Total Variable Cost Per Unit:
Direct materials
$20
$20
$20
Direct labor
$12
$12
$12
Variable manufacturing overhead
$7
$7
$7
Total Variable Cost Per Unit
$39
$39
$39
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