Haas Company manufactures and sells one product. The following information perta
ID: 2554134 • 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:
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 $46 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.
Variable costs per unit: Manufacturing: Direct materials $ 20 Direct labor $ 12 Variable manufacturing overhead $ 7 Variable selling and administrative $ 3 Fixed costs per year: Fixed manufacturing overhead $ 110,000 Fixed selling and administrative expenses $ 50,000Explanation / Answer
Solution:
Part 1 --- Break Even Point in unit sales
Break Even Point in unit sales = Total Fixed Cost / CM Ratio
CM Ratio = Contribution Margin / Sales x 100
Contribution Margin = Selling Price per unit $46 – Total Variable Cost per unit (20 + 12 + 7 + 3)
= $46 – 42
= $4
CM Ratio = Contribution Margin $4 / Sales 46 = 0.08695652 or 8.695652%
Break Even Point in unit sales = Total Fixed Cost (110,000 + 50,000) / CM Ratio 0.
= 160,000 / 0.08695652
= $1,840,000
Part 2(a) – Unit Product Cost for Year 1, 2 & 3 (Using Variable Costing)
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.
Unit Product Cost
Year 1
Year 2
Year 3
Direct materials cost per unit
$20.00
$20.00
$20.00
Direct labor cost per unit
$12.00
$12.00
$12.00
Variable Manufacturing Overhead per unit
$7.00
$7.00
$7.00
Unit Product Cost
$39.00
$39.00
$39.00
Part 2(b) – Income Statement for Year 1, 2 & 3
Income Statement (Using Variable Costing)
Year 1
Year 2
Year 3
Sales (Sold Units * $46)
$1,840,000
$1,380,000
$2,070,000
Variable Expenses:
Production Cost (Units Produced * Unit Product Cost)
$1,560,000
$2,145,000
$780,000
Plus: Beginning Inventory (ending inventory of last year)
$0
$975,000
Less: Ending Inventory
(Ending Units x Unit Product Cost $39)
$0
-$975,000
Variable Cost of Goods Sold
$1,560,000
$1,170,000
$1,755,000
Add: Variable S&A Expenses (Unit Sold x $3)
$120,000
$90,000
$135,000
Total Variable Expenses
$1,680,000
$1,260,000
$1,890,000
Contribution Margin (Sales - Total Variable Expenses)
$160,000
$120,000
$180,000
Fixed Expenses:
Fixed Manufacturing Overhead
$110,000
$110,000
$110,000
Fixed S&A Expenses
$50,000
$50,000
$50,000
Total Fixed Expenses
$160,000
$160,000
$160,000
Net Operating Income (loss)
$0
-$40,000
$20,000
Calculation of Ending and Beginning Inventory
Year 1
Year 2
Year 3
Produced Units
40000
55000
20000
Add: Beginning Inventory
0
0
25,000
Units Available for Sale
40000
55,000
45000
Less: Units Sold
40,000
30,000
45,000
Ending Inventory
0
25000
0
Part 3(a) – unit Product Cost using Absorption Costing
Unit Product Cost
Year 1
Year 2
Year 3
Direct materials cost per unit
$20.00
$20.00
$20.00
Direct labor cost per unit
$12.00
$12.00
$12.00
Variable Manufacturing Overhead per unit
$7.00
$7.00
$7.00
Applied Manufacturing Overhead
(Total Fixed Manufacturing OH / Produced Units)
$2.75
$2.00
$5.50
Unit Product Cost
$41.75
$41.00
$44.50
Part 3(b) – Income Statement using Absorption Costing
Income Statement (Using Absorption Costing)
Year 1
Year 2
Year 3
Sales (Sold Units * $46)
$1,840,000
$1,380,000
$2,070,000
Variable Expenses:
Production Cost (Units Produced * Unit Product Cost)
$1,670,000
$2,255,000
$890,000
Plus: Beginning Inventory
$0
$1,025,000
Less: Ending Inventory
(Ending Units x Unit Product Cost)
$0
-$1,025,000
(25,000 Units*$41)
Cost of Goods Sold
$1,670,000
$1,230,000
$1,915,000
Gross Profit (Sales - COGS)
$170,000
$150,000
$155,000
Selling and Admn Expenses:
Variable S&A Expenses (Unit Sold x $3)
$120,000
$90,000
$135,000
Fixed S&A Expenses
$50,000
$50,000
$50,000
Total Fixed Expenses
$170,000
$140,000
$185,000
Net Operating Income (loss)
$0
$10,000
-$30,000
Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you
Unit Product Cost
Year 1
Year 2
Year 3
Direct materials cost per unit
$20.00
$20.00
$20.00
Direct labor cost per unit
$12.00
$12.00
$12.00
Variable Manufacturing Overhead per unit
$7.00
$7.00
$7.00
Unit Product Cost
$39.00
$39.00
$39.00
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