Chapter 6 Problem One Your Company manufactures and sells one product. the selli
ID: 2416460 • Letter: C
Question
Chapter 6 Problem One Your Company manufactures and sells one product. the selling price per unit is $80 per unit. The following pertains to the company's first year of operations in which it produced 40,000 and sold 35,000 units. Variable costs: Manufacturing: Direct materials Direct labor Variable manufacturing overhead Variable selling 960,000 560,000 80,000 140,000 Fixed Costs per year: Fixed manufacturing Fixed selling and administrative 840,000 490,000 Instructions: 1.Using the above information prepare an income statement in the traditional format. 2. Prepare an income statement in the contribution format. 3. Compute the unit cost under absorption costing. 4. Compute the unit cost under variable costing. 5. Compute the contribution margin per unit. 6. Compute the contribution margin ratio 7. There is a difference in the net income using one statement versus the other; explain the cause of the difference 8. Compute the breakeven sales in units 9. Compute the breakeven sales dollars.Explanation / Answer
1
Income Statement
Traditional Format
Sales (35000 units * $80)
$ 2,800,000
Less: Cost of Goods sold
Direct Materials (960000*35000/40000)
$ 840,000
Direct Labor (560000*35000/40000)
$ 490,000
Variable Manufacturing overhead (80000*35000/40000)
$ 70,000
Fixed Manufacturing
$ 840,000
Total cost of Goods sold
$ 2,240,000
Gross Margin = Sales - Total Cost of goods sold =
$ 560,000
Less: Operating Expenses
Variable Selling
$ 140,000
Fixed Selling and administrative
$ 490,000
Total Operating Expenses
$ 630,000
Net Income = Gross Margin - Total Operating Expenses =
$ (70,000)
2
Income Statement
Contribution Format
Sales (35000 units * $80)
$ 2,800,000
Less: Variable Expenses
Direct Materials (960000*35000/40000)
$ 840,000
Direct Labor (560000*35000/40000)
$ 490,000
Variable Manufacturing overhead (80000*35000/40000)
$ 70,000
Variable Selling
$ 140,000
Total variable expenses
$ 1,540,000
Contribution Margin = Sales - Total Variable expenses =
$ 1,260,000
Less: Fixed Expenses:
Fixed Manufacturing
$ 840,000
Fixed Selling and administrative
$ 490,000
Total Fixed Expenses
$ 1,330,000
Net income = Cont. Margin - total Fixed Expenses =
$ (70,000)
3
Calculation of Unit cost under Absorption Costing:
Direct Materials
$ 960,000
Direct Labor
$ 560,000
Variable Manufacturing overhead
$ 80,000
Fixed Manufacturing
$ 840,000
Total Cost (A)
$ 2,440,000
Number of units produced (B)
40,000
Unit cost under Absorption Costing = A/B =
$ 61.00
4
Calculation of Unit cost under variable Costing:
Direct Materials
$ 960,000
Direct Labor
$ 560,000
Variable Manufacturing overhead
$ 80,000
Total Cost (A)
$ 1,600,000
Number of units produced (B)
40,000
Unit cost under Absorption Costing = A/B =
$ 40.00
1
Income Statement
Traditional Format
Sales (35000 units * $80)
$ 2,800,000
Less: Cost of Goods sold
Direct Materials (960000*35000/40000)
$ 840,000
Direct Labor (560000*35000/40000)
$ 490,000
Variable Manufacturing overhead (80000*35000/40000)
$ 70,000
Fixed Manufacturing
$ 840,000
Total cost of Goods sold
$ 2,240,000
Gross Margin = Sales - Total Cost of goods sold =
$ 560,000
Less: Operating Expenses
Variable Selling
$ 140,000
Fixed Selling and administrative
$ 490,000
Total Operating Expenses
$ 630,000
Net Income = Gross Margin - Total Operating Expenses =
$ (70,000)
2
Income Statement
Contribution Format
Sales (35000 units * $80)
$ 2,800,000
Less: Variable Expenses
Direct Materials (960000*35000/40000)
$ 840,000
Direct Labor (560000*35000/40000)
$ 490,000
Variable Manufacturing overhead (80000*35000/40000)
$ 70,000
Variable Selling
$ 140,000
Total variable expenses
$ 1,540,000
Contribution Margin = Sales - Total Variable expenses =
$ 1,260,000
Less: Fixed Expenses:
Fixed Manufacturing
$ 840,000
Fixed Selling and administrative
$ 490,000
Total Fixed Expenses
$ 1,330,000
Net income = Cont. Margin - total Fixed Expenses =
$ (70,000)
3
Calculation of Unit cost under Absorption Costing:
Direct Materials
$ 960,000
Direct Labor
$ 560,000
Variable Manufacturing overhead
$ 80,000
Fixed Manufacturing
$ 840,000
Total Cost (A)
$ 2,440,000
Number of units produced (B)
40,000
Unit cost under Absorption Costing = A/B =
$ 61.00
4
Calculation of Unit cost under variable Costing:
Direct Materials
$ 960,000
Direct Labor
$ 560,000
Variable Manufacturing overhead
$ 80,000
Total Cost (A)
$ 1,600,000
Number of units produced (B)
40,000
Unit cost under Absorption Costing = A/B =
$ 40.00