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

36,000   

  Units sold

31,000   

  Selling price per unit

$84   

  Selling and administrative expenses:

    Variable per unit

$3   

    Fixed per month

$

557,000   

  Manufacturing costs:

    Direct materials cost per unit

$16   

    Direct labor cost per unit

$9   

    Variable manufacturing overhead cost per unit

$1   

    Fixed manufacturing overhead cost per month

$

576,000   

  

    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

1. Absorption costing:

a. Unit product cost = Direct material cost + direct labor cost + variable manufacturing cost + fixed manufacturing cost = $ ( 16 + 9 + 1 + 16 ) = $ 42

b. Income statement for the month of May:

2. Variable costing:

Unit product cost = direct material cost + direct labor cost + variable manufacturing overhead cost + variable administrative and selling cost = $ ( 16 +9 +1 + 3) = $ 29

Income Statement for the month of May:

Number of units produced 36,000 Number of units sold 31,000 Sales revenue ( 31,000 x 84) 2,604,000 Less cost of manufacturing Variable cost (36,000 x 26) 9,36,000 Fixed cost 5,76,000 Total cost of manufacturing 1,512,000 Add cost of beginning inventory 0 Less cost of ending inventory (5,000 x 42) 210,000 Cost of goods manufactured and sold 1,302,000 Gross profit 1,302,000 Less nonproduction cost Selling and administrative expenses Variable (31,000 x 3 ) 93,000 Fixed 557,000 Net operating income before taxes 652,000

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