Haas Company manufactures and sells one product. The following information perta
ID: 2331232 • 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: 21 13 Direct materials Direct labor Variable manufacturing overhead Variable selling and adninistrative Fixed costs per year Fixed manufacturing overhead Fixed selling and administrative expenses $ 330,000 $ 150,000 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 $52 per unit. Required 1. Compute the company's break-even point in unit sales 2. Assume the company uses variable costing a. Compute the unit product cost for Year 1, Year 2, and Year 3. b. 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 b. Prepare an income statement for Year 1, Year 2, and Year 3Explanation / Answer
Solution:
Part 1 – Break Even Point in Units
Break Even Point in Units
Total Fixed Cost
(Manufacturing 330,000 + Selling and Admn 150,000)
$480,000
Contribution Margin Per Unit (Refer Note 1)
$12
Break Even Point in Units (Fixed Cost / Unit CM)
40000
Units
Note 1 --
Unit Selling Price
$52
Less: Unit Variable Costs
Direct materials
$21
Direct Labor
$13
Variable manufacturing overhead
$4
Variable selling and administrative overhead
$2
Total Unit Variable Cost
$40
Contribution Margin Per Unit (Selling Price - VC)
$12
Part 2 –
Variable Costing System
1) Product Cost refers to the costs used to fabricate/make/produce a product.
2) Under Variable Costing System, product cost includes only following variable manufacturing costs:
- Cost of direct material used
- Direct labor cost
- Variable manufacturing overheads.
3) Under this system, fixed costs are not considered in product cost and for valuation of closing stock of finished goods. Fixed costs are treated as period cost in this system.
4) The value of finished goods and work in process is also comprised only of Manufacturing Variable Costs.
5) Selling and administrative expenses are not included because these are not the expenses incurred in production department. These expenses relate to selling and admin department.
Part 2(a) – Unit Product Cost for Year 1, 2 & 3
Unit Product Cost Under Variable Costing
Year 1
Year 2
Year 3
Direct materials
$21
$21
$21
Direct Labor
$13
$13
$13
Variable manufacturing overhead
$4
$4
$4
Unit Product Cost
$38
$38
$38
Part 2(b) – Income Statement under variable costing
Income Statement (Using Variable Costing)
Year 1
Year 2
Year 3
Sales (@ $52 per unit)
$2,080,000
$1,560,000
$2,340,000
Variable Costs:
Variable Cost of Goods Sold (@ $38 per unit)
$1,520,000
$1,140,000
$1,710,000
Add: Variable Selling and administrative expense (@ $2 per unit)
$80,000
$60,000
$90,000
Total Variable Cost
$1,600,000
$1,200,000
$1,800,000
Contribution Margin (Sales - Total Variable Costs)
$480,000
$360,000
$540,000
Fixed Costs:
Fixed Manufacturing Overhead
$330,000
$330,000
$330,000
Fixed Selling and Administrative Expense
$150,000
$150,000
$150,000
Total Fixed Costs
$480,000
$480,000
$480,000
Net Operating Income
$0
($120,000)
$60,000
Part 3(a) – Unit Product Cost under Absorption Costing for Year 1, 2 & 3
Absorption Costing System
- Product Cost refers to the costs used to fabricate/make/produce a product.
- Under Absorption Costing, product cost includes both fixed and variable manufacturing expenses incurred in fabrication of the product or service.
- It includes cost of direct material used, cost of direct labor, consumable supplies used and manufacturing/factory overheads (both variable as well as fixed factory overhead).
- Ending Inventory is valued on Production Cost.
- Product Cost does not include Selling, General and Administrative Expenses.
Unit Product Cost Under Absorption Costing
Year 1
Year 2
Year 3
Direct materials
$21.00
$21.00
$21.00
Direct Labor
$13.00
$13.00
$13.00
Variable manufacturing overhead
$4.00
$4.00
$4.00
Applied Fixed Manufacturing Overhead Per Unit
(Total Fixed Manufacturing Overhead $330,000 / Units Produced)
$8.25
$6.00
$16.50
Unit Product Cost
$46.25
$44.00
$54.50
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Break Even Point in Units
Total Fixed Cost
(Manufacturing 330,000 + Selling and Admn 150,000)
$480,000
Contribution Margin Per Unit (Refer Note 1)
$12
Break Even Point in Units (Fixed Cost / Unit CM)
40000
Units
Note 1 --
Unit Selling Price
$52
Less: Unit Variable Costs
Direct materials
$21
Direct Labor
$13
Variable manufacturing overhead
$4
Variable selling and administrative overhead
$2
Total Unit Variable Cost
$40
Contribution Margin Per Unit (Selling Price - VC)
$12
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