Haas Company manufactures and sells one product. The following information pertains to each of the company’s first three years of operations:

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	$	27
Direct labor	$	19
Variable manufacturing overhead	$	3
Variable selling and administrative	$	2
Fixed costs per year:
Fixed manufacturing overhead	$	460,000
Fixed selling and administrative expenses	$	240,000

During its first year of operations, Haas produced 100,000 units and sold 100,000 units. During its second year of operations, it produced 115,000 units and sold 90,000 units. In its third year, Haas produced 80,000 units and sold 105,000 units. The selling price of the company’s product is $58 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

1.

The break-even point in units sold can be computed using the contribution margin per unit as follows:

Selling price per unit	$	58
Variable cost per unit ($27 + $19 + $3 + $2)		51
Contribution margin per unit	$	7

Break-even unit sales	=	Fixed expenses ÷ Unit contribution margin
	=	($460,000 + $240,000) ÷ $7 per unit
	=	$700,000 ÷ $7
	=	100,000 units

2.
a.
Under variable costing, only the variable manufacturing costs are included in product costs.

	Year 1		Year 2		Year 3
Direct materials	$	27	$	27	$	27
Direct labor		19		19		19
Variable manufacturing overhead		3		3		3
Variable costing unit product cost	$	49	$	49	$	49

Note that selling and administrative expenses are not treated as product costs; that is, they are not included in the costs that are inventoried. These expenses are always treated as period costs.

b.

	Year 1		Year 2		Year 3
Sales (@ $58 per unit)	$	5,800,000	$	5,220,000	$	6,090,000
Variable cost of goods sold @ $49 per unit		4,900,000		4,410,000		5,145,000
Variable selling and administrative @ $2 per unit		200,000		180,000		210,000

3.

a.

The unit product costs under absorption costing:

	Year 1			Year 2			Year 3
Direct materials	$	27.00		$	27.00		$	27.00
Direct labor		19.00			19.00			19.00
Variable manufacturing overhead		3.00			3.00			3.00
Fixed manufacturing overhead		4.60	*		4.00	**		5.75	***
Absorption costing unit product cost	$	53.60		$	53.00		$	54.75

*$460,000 ÷ 100,000 units = $4.60 per unit.

**$460,000 ÷ 115,000 units = $4.00 per unit.

***$460,000 ÷ 80,000 units = $5.75 per unit.

b.

Cost of goods sold computations:

Year 1: 100,000 units × $53.60 per unit = $5,360,000

Year 2: 90,000 units × $53.00 per unit = $4,770,000

Year 3: (25,000 × $53.00 per unit) + (80,000 × $54.75 per unit) = $5,705,000

Thanks