Haas Company manufactures and sells one product. The following information perta

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: Direct materials $ 26 Direct labor $ 18 Variable manufacturing overhead $ 9 Variable selling and administrative $ 1 Fixed costs per year: Fixed manufacturing overhead $ 540,000 Fixed selling and administrative expenses $ 120,000 During its first year of operations, Haas 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, Haas produced 40,000 units and sold 65,000 units. The selling price of the company’s product is $65 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 3.

Explanation / Answer

Req 1: Selling price per unit 65 Less: Variable cost per unit (26+18+9+1) 54 Contribution Margin per unit 11 Total fixed cost (540000+120000): 660000 Break even units: Total Fixed cost / CM perr unit 660000 /11 = 60000 units Req 2-a: Variable costing Compute the Variable costing Unit Product cost Year 1 Year 2 Year 3 Direct Material 26 26 26 Direct labour 18 18 18 Variable Manufacturing overheads 9 9 9 Variable costing unit prroduct cost 53 53 53 Construct The Variable Costing Income Statement under FIFO YEAR 1 YEAR 2 Year 3 Sales 3,900,000 3,250,000 4,225,000 Less: Variable cost    variable cost of goods sold 3,180,000 2,650,000 3,445,000    Variable selling expense 60,000 3,240,000 50,000 2,700,000 65,000 3,510,000 Contribution margin 660,000 550,000 715,000 Fixed expense:    Fixed Manufacturing overheads 540,000 540,000 540,000    Fixed selling expense 120,000 120,000 120,000 Net operating Income 0 -110,000 55,000 Req 3 Absorption costing: Construct The Absorption Costing Unit Product Cost Year 1 Year 2 Year 3 Direct Material 26 26 26 Direct labour 18 18 18 Variable Manufacturing overheads 9 9 9 Fixed Manufacturing overheads 9.00 7.20 13.5 Absorption costing unit prroduct cost 62.00 60.20 66.5 Construct the Absorption Costing Income Statement Under FIFO Year 1 Year 2 Year 3 Sales $3,900,000 $3,250,000 4225000 Cost of Goods sold 3720000 3010000 4165000 Gross Margin $180,000 $240,000 60000 Selling and distribution expense 180,000 170,000 185000 Net operating income 0 70,000 -125000

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