Nickelson Company manufactures and sells one product. The following information

Question

Nickelson 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: Direct materials $26 Direct labor $13 Variable manufacturing overhead $5 Variable selling and administrative $3 Fixed costs per year: Fixed manufacturing overhead $ 450,000 Fixed selling and administrative expenses $ 210,000 During its first year of operations Nickelson produced 60,000 units and sold 60,000 units. During its second year of operations it produced 75,000 units and sold 50,000 units. In its third year, Nickelson produced 40,000 units and sold 65,000 units. The selling price of the company’s product is $58 per unit. Required: 1. Compute the company’s break-even point in units sold. 2a. Assume the company uses variable costing : Compute the unit product cost for year 1, year2, year 3. 2b. Prepare an income statement for year 1, year 2, year 3. 3a. Assume the company uses absorption costing: Compute the unit product cost for year 1, year 2, year 3. 3b. Prepapre an income statement for year 1, year 2, year 3.

Explanation / Answer

1. Break even point units = Fixed cost / Contribution per unit
= ($450000 + $210000)/ (58-26-13-5-3) = $660000/11 = 60000 units

2 a.
Unit product cost for year 1,2 and 3 is Direct materials + Direct labor + Variable manufacturing overhead = $26+$13+$5 = $44 (for all the three years)

2 b.

Variable costing income statement:

Year 1:
Sales - variable cost - Fixed cost = Net operating income or loss
= ($58*60000) - ($47*60000) - ($300000+$180000)
= $3480000 - $2820000 - $480000 = $180000

Year 2:
Sales - variable cost - Fixed cost = Net operating income or loss
= ($58*50000) - ($47*50000) - ($300000+$180000)
= $2900000 - $2350000 - $480000
= $70000

Year 3:
Sales - variable cost - Fixed cost = Net operating income or loss
= ($58*65000) - ($47*65000) - ($300000+$180000)
= $3770000 - $3055000 - $480000
= $235000

3a.

Fixed manufacturing overhead per unit:
Year 1: $300000/60000 = $5 per unit
Year 2: $300000/75000 = $4 per unit
Year 3: $300000/40000 = $7.50 per unit

Unit product cost:
Year 1: 44+5 = 49
Year 2: 44+4 = 48
Year 3: 44+7.5 = 51.5

3 b.
Net operating income statement:
Year 1:
Sales - Cost of good sold - selling and administration expense
= 58*60000 - 49*60000 - 300000
= 3480000 - 2940000 - 300000
= $240000

Year 2:
Sales - Cost of good sold - selling and administration expense
= 58*50000 - 48*50000 - $280000
= $2900000 - $2400000 - $280000
= $220000

Year 3:
Sales - Cost of good sold - selling and administration expense
= 58*65000 - (48*25000+51.5*40000) - 310000
= $3770000 - $3260000 - $310000
= $200000

4.
The absorption costing figures look counter - intuitive. In the year 2, the number of units sold is below the break even point but the absorption costing reports a net income greater than zero.
In the year 3 also, the number of units sold is below the break even point but the absorption costing reports a net income greater than zero

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