Variable Cost Per Unit: Manufacturing:
Direct Materials = $20
Direct Labor = $12
Variable Manufacturing Overhead = $4
Variable Selling and Administrative = $2
Fixed costs per year:
Fixed manufacturing overhead = $960,000
Fixed selling and administrative expenses = $240,000
During its first year of Operations, produced 60,000 units and sold 60,000 units. During it's second year of operations, it produced 75,000 and sold 50,000 units. In its third year, it produced 40,000 units and sold 65,000 units. The selling price of the companys product is $58 per unit.
1. Compute the companys break even point in units sold.
2. Assume the company uses the variable costing:
a. Compete the unit product cost for year 1, year 2, year 3
b. Prepare an income statement for year 1, 2, and 3
3. Assume the company uses absorption costing:
a. Compute the unit product cost for year 1, 2, and 3
b. Prepare an income statement for year 1, 2, and 3
4. Compare the net operating income figures that you computed in requirements 2 and 3 to the break even point that you computed in requirement 1. which net operating income figures seem counterintuitive? why?

1. Break-even point in units sold = Fixed cost/Contribution margin

= $1,200,000/$20 = 60,000 units

2-a.                                    First Year      Second Year       Third Year

Unit variable product costs:

Direct Materials =                 $20

Direct Labor =                       $12

Manufacturing Overhead =  $4

Product costs                      $36                 $36                 $36

Selling and admin. cost        $2

Total variable mfg. costs = $38                 $38                 $38

b. Income Statements:

                                         First Year      Second Year         Third Year

Sales unit                            60,000               50,000                 65,000

Sales revenue               $3,480,000     $2,900,000          $3,770,000

Variable cost of goods sold:

Manufacturing                 2,160,000        1,800,000           2,340,000

Product contribution     $1,320,000      $1,100,000          $1,430,000

Selling and administrative 120,000           100,000               130,000

Contribution margin     $1,200,000      $1,000,000        $1,300,000

Total fixed costs             1,200,000         1,200,000          1,200,000

Net income                    $0                     ($200,000)          $100,000

3. Absorption costing:

                                     First Year      Second Year       Third Year

Unit product costs:

Variable cost per unit       $36                $36                      $36

Total variable cost      $2,160,000    $2,700,000          $1,440,000

Fixed manufacturing       960,000         960,000              960,000

Total manufacturing   $3,120,000    $3,660,000        $2,400,000

Production units                60,000            75,000               40,000

Unit product costs              $52               $48.80                 $60

b. Income Statements:

                                        First Year      Second Year        Third Year

Sales unit                           60,000               50,000              65,000

Sales revenue            $3,480,000       $2,900,000       $3,770,000

Cost of goods sold       3,120,000          2,440,000         3,900,000

Gross profit                   $360,000          $460,000          ($130,000)

Selling and admin.          240,000            240,000             240,000

Net income (loss)          $120,000          $220,000         ($370,000)

4. The net operating income from absorption costing seem counterintuitive.  The reason is because of the use of different measures; Requirement 2 is based on variable product costs while requirement 3 is based on absorption product costs.

Explanation:

a) Data and Calculations:

Variable Cost Per Unit:

Manufacturing:

Direct Materials =                               $20

Direct Labor =                                     $12

Variable Manufacturing Overhead =  $4

Variable manufacturing costs =        $36

Variable Selling and Administrative = $2

Total variable costs =                        $38

Fixed costs per year:

Fixed manufacturing overhead =                   $960,000

Fixed selling and administrative expenses = $240,000

Total fixed costs =                                         $1,200,000

Production and Sales Units

                            First Year      Second Year       Third Year

Production units  60,000            75,000                40,000

Sales unit             60,000           50,000                 65,000

Selling price per unit = $58

Variable cost per unit =  38

Contribution margin    $20