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: Beginning inventory 0 Units produced 49,000 Units sold 44,000 Selling price per unit $80 Selling and administrative expenses: Variable per unit $4 Fixed per month $ 558,000 Manufacturing costs: Direct materials cost per unit $18 Direct labor cost per unit $10 Variable manufacturing overhead cost per unit $1 Fixed manufacturing overhead cost per month $ 784,000 Management is anxious to see how profitable the new camp cot will be and has asked that an income statement be prepared for 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.

Explanation / Answer

1a)calculation of unit product cost under absorption costing

direct material = $ 18

direct labour= $ 10

variable maufaturing overhead = $ 1

fixed manufaturing overhead = $ 784,000/49,000=$ 16

total unit product cost = $(18+10+1+16)=$ 45

1b) calculation of income statement

sales= $ 80*40,000= $ 3,200,000

less cost of goods sold =$ 45*40,000=$ 1,800,000

gross margin = $ 1,400,000

less =variable selling ovehead = $ 4*40,000=$ (160,000)

less fixed selling overheads = $ (558,000)

net operating income =$ 682,000

2) calculation of unit product cost under variable costing method

direct material = $ 18

direct labour= $ 10

variable maufaturing overhead = $ 1

total product cost per unit =$ 29

2b)contribution format income statement

sales =$ 80*40,000=$ 3,200,000

less variable exp=$ 29* 40,000=$ (1,160,000)

less variable selling and administrative exp =$ 4* 40,000=(1,60,000)

contribution margin= $ 1,880,000

less fixed manufaturing overhead = $ (784,000)

less fixed selling and administrative overheads = $ (558,000)

net operating income=$ 538,000

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