The following income statements illustrate different cost structures for two competing companies:

The following income statements illustrate different cost structures for two competing companies:

Income Statements
	Company Name
	Munoz				Jordan
Number of customers (a)		85				85
Sales revenue (a × $210)	$	17,850			$	17,850
Variable cost (a × $185)		N/A				(15,725	)
Variable cost (a × $0)		0				N/A
Contribution margin		17,850				2,125
Fixed cost		(15,725	)			0
Net income	$	2,125			$	2,125

Required

1. Reconstruct Munoz’s income statement, assuming that it serves 170 customers when it lures 85 customers away from Jordan by lowering the sales price to $110 per customer.
   
2. Reconstruct Jordan’s income statement, assuming that it serves 170 customers when it lures 85 customers away from Munoz by lowering the sales price to $110 per customer.
   
   
   
   a. & b.

   Income Statements
   	a.				b.
   Company Name	Munoz				Jordan
   Number of Customers (n)		170				170
   Sales revenue (n × $110)	$	18,700			$	18,700
   Variable cost (n × $185)						(31,450	)
   Variable cost (n × $0)		0
   Contribution margin		18,700				(12,750	)
   Fixed cost		(15,725	)			0
   Net income (loss)	$	2,975			$	(12,750	)

   
   

Thanks

During year 1, Rooney Manufacturing Company incurred $8,000,000 of research and development (R&D) costs to create a long-life battery to use in computers. In accordance with FASB standards, the entire R&D cost was recognized as an expense in year 1.

During year 1, Rooney Manufacturing Company incurred $8,000,000 of research and development (R&D) costs to create a long-life battery to use in computers. In accordance with FASB standards, the entire R&D cost was recognized as an expense in year 1. Manufacturing costs (direct materials, direct labor, and overhead) are expected to be $45 per unit. Packaging, shipping, and sales commissions are expected to be $8 per unit. Rooney expects to sell 2,000,000 batteries before new research renders the battery design technologically obsolete. During year 1, Rooney made 440,000 batteries and sold 400,000 of them.
 

Required

1. Identify the upstream and downstream costs.
   
2. Determine the year 1 amount of cost of goods sold and the ending inventory balance that would appear on the financial statements that are prepared in accordance with GAAP.
   
3. Determine the sales price assuming that Rooney desires to earn a profit margin that is equal to 25 percent of the total cost of developing, making, and distributing the batteries.
   
4. Prepare a GAAP-based income statement for year 1. Use the sales price developed in Requirement c.

Answer

a.
The $8,000,000 of research and development cost is an upstream cost while packaging, shipping, and sales commissions are downstream costs.

b.
Cost of goods sold: $45 × 400,000 = $18,000,000
Ending inventory: $45 × 40,000 = $1,800,000

c.

Upstream cost per unit, $8,000,000 ÷ 2,000,000	$	4.00
Manufacturing cost per unit		45.00
Downstream costs per unit		8.00
Total cost		57.00
Plus: 25% profit margin, $57.00 × 25%		14.25
Price	$	71.25

d.
Sales revenue: $71.25 × 400,000 = $28,500,000
Selling expenses: $8 × 400,000 = $3,200,000

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