Question 19: Haas Company Manufactures And Sells One Product. The Following Information Pertains To Each Of The Company’s First Three Years Of Operations:
Question 19: 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
$25
Direct labor
$17
Variable manufacturing overhead
$8
Variable selling and administrative
$3
Fixed costs per year:
Fixed manufacturing overhead
$
150,000
Fixed selling and administrative expenses
$
90,000
During its first year of operations, Haas produced 60,000 units and sold 60,000 units. During its second year of operations, it produced 75,000 units and sold 50,000 units. In its third year, Haas produced 40,000 units and sold 65,000 units. The selling price of the company’s product is $57 per unit.
Required:
1.
Compute the company’s break-even point in units sold.
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. (Round your intermediate and final answers to 2 decimal places.)
b.
Prepare an income statement for year 1, year 2, and year 3. (Round your intermediate calculations to 2 decimal places.)
The Correct Answer and Explanation is :
To address the requirements of Haas Company’s break-even and income statements, let’s go through each part step-by-step.
1. Break-even Point in Units Sold (Using Absorption or Variable Costing)
To calculate the break-even point in units, we use the following formula:
[
\text{Break-even point in units} = \frac{\text{Fixed Costs}}{\text{Contribution Margin per Unit}}
]
Where the contribution margin per unit is calculated as:
[
\text{Contribution Margin per Unit} = \text{Selling Price} – \text{Variable Costs per Unit}
]
The total variable costs per unit are:
- Direct materials = $25
- Direct labor = $17
- Variable manufacturing overhead = $8
- Variable selling and administrative = $3
[
\text{Total Variable Costs per Unit} = 25 + 17 + 8 + 3 = 53
]
The selling price is $57, so the contribution margin per unit is:
[
\text{Contribution Margin per Unit} = 57 – 53 = 4
]
Now, we can calculate the break-even point:
[
\text{Fixed Costs} = \text{Fixed Manufacturing Overhead} + \text{Fixed Selling and Administrative Expenses} = 150,000 + 90,000 = 240,000
]
[
\text{Break-even Point} = \frac{240,000}{4} = 60,000 \text{ units}
]
2. Variable Costing
a. Unit Product Cost for Year 1, Year 2, and Year 3
The unit product cost under variable costing is calculated as the sum of variable costs:
[
\text{Unit Product Cost} = \text{Variable Direct Materials} + \text{Variable Direct Labor} + \text{Variable Manufacturing Overhead} + \text{Variable Selling and Administrative Expenses}
]
From the information provided:
[
\text{Unit Product Cost} = 25 + 17 + 8 + 3 = 53
]
Thus, the unit product cost is $53 for each year (since the variable costs are constant).
b. Income Statement for Year 1, Year 2, and Year 3 (Variable Costing)
The formula for calculating net income under variable costing is:
[
\text{Net Income} = \text{Sales} – \text{Variable Costs} – \text{Fixed Costs}
]
We’ll calculate these for each year.
For Year 1:
- Units Sold: 60,000
- Sales = 60,000 × 57 = 3,420,000
- Variable Costs = 60,000 × 53 = 3,180,000
- Fixed Costs = 240,000
- Net Income = 3,420,000 – 3,180,000 – 240,000 = 0
For Year 2:
- Units Sold: 50,000
- Sales = 50,000 × 57 = 2,850,000
- Variable Costs = 50,000 × 53 = 2,650,000
- Fixed Costs = 240,000
- Net Income = 2,850,000 – 2,650,000 – 240,000 = -40,000
For Year 3:
- Units Sold: 65,000
- Sales = 65,000 × 57 = 3,705,000
- Variable Costs = 65,000 × 53 = 3,445,000
- Fixed Costs = 240,000
- Net Income = 3,705,000 – 3,445,000 – 240,000 = 20,000
3. Absorption Costing
a. Unit Product Cost for Year 1, Year 2, and Year 3 (Absorption Costing)
The unit product cost under absorption costing includes both variable and fixed manufacturing costs. The formula is:
[
\text{Unit Product Cost (Absorption)} = \text{Variable Manufacturing Cost} + \frac{\text{Fixed Manufacturing Overhead}}{\text{Units Produced}}
]
For each year:
- Year 1:
- Variable manufacturing cost per unit = 25 + 17 + 8 = 50
- Fixed manufacturing overhead per unit = 150,000 / 60,000 = 2.5
- Total unit cost = 50 + 2.5 = 52.5
- Year 2:
- Variable manufacturing cost per unit = 50
- Fixed manufacturing overhead per unit = 150,000 / 75,000 = 2
- Total unit cost = 50 + 2 = 52
- Year 3:
- Variable manufacturing cost per unit = 50
- Fixed manufacturing overhead per unit = 150,000 / 40,000 = 3.75
- Total unit cost = 50 + 3.75 = 53.75
b. Income Statement for Year 1, Year 2, and Year 3 (Absorption Costing)
Under absorption costing, fixed manufacturing overhead is included in the cost of goods sold based on the units sold. We can calculate net income using the formula:
[
\text{Net Income} = \text{Sales} – \text{Cost of Goods Sold} – \text{Fixed Costs}
]
For Year 1:
- Cost of Goods Sold = 60,000 × 52.5 = 3,150,000
- Sales = 60,000 × 57 = 3,420,000
- Fixed Costs = 240,000
- Net Income = 3,420,000 – 3,150,000 – 240,000 = 30,000
For Year 2:
- Cost of Goods Sold = 50,000 × 52 = 2,600,000
- Sales = 50,000 × 57 = 2,850,000
- Fixed Costs = 240,000
- Net Income = 2,850,000 – 2,600,000 – 240,000 = 10,000
For Year 3:
- Cost of Goods Sold = 65,000 × 53.75 = 3,493,750
- Sales = 65,000 × 57 = 3,705,000
- Fixed Costs = 240,000
- Net Income = 3,705,000 – 3,493,750 – 240,000 = -28,750
This is the summary of the break-even analysis, unit product costs, and income statements under variable and absorption costing. I’ll now generate an image for you with the relevant calculations.
I have generated a table with the relevant calculations for the break-even analysis, income statements, and unit product costs under both variable and absorption costing. You can now review the information and calculations for each year.
Let me know if you need further clarification or adjustments!