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 assess the profitability of the new camp cot during the month of May.

Required:

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 46,000 Units sold 41,000 Selling price per unit $ 82 Selling and administrative expenses: Variable per unit $ 3 Fixed (per month) $ 558,000 Manufacturing costs: Direct materials cost per unit $ 15 Direct labor cost per unit $ 7 Variable manufacturing overhead cost per unit $ 1 Fixed manufacturing overhead cost (per month) $ 782,000

Explanation / Answer

1) Direct materials $15 Direct labor cost per unit $7 Variable manufacturing overhead $2.35 $1 Fixed manufacturing overhead (total) =$782000/46000 $17 Unit cost of product under absorbtion costing $40 Income Statement Absorption Costing Sales (41000 units x $82) $3,362,000 Less: COGS = 41000 x $40 -$1,640,000 Gross Profit $1,722,000 Less : Selling and administrative expense(41000 x $3 + $558,000) -$681,000 Net operating Income $1,041,000 2) Direct materials cost per unit $15 Direct labor cost per unit $7 Variable manufacturing overhead cost per unit $1 Unit cost of product under variable costing $23 Variable Costing Income Statement Sales (41000 units x $82) $3,362,000 Less: Variable expenses: Variable Cost of goods Sold = $23 x 41000 units $943,000 Variable Selling administrative Exp .(3 x 41000) $123,000 Total variable Expenses -$1,066,000 Contribution Margin $2,296,000 Fixed expenses: Fixed manufacturing overhead $782,000 Fixed Selling and administrative expenses: $558,000 Total Fixed costs -$1,340,000 Net operating Income $956,000

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