Question 1: Denton Company manufactures and sells a single product. Cost data for the product are given below: Variable cost per unit: Fixed costs per month: Direct materials $7 Fixed manufacturing overhead $315,000 Direct labor 10 Fixed selling and administrative 245,000 Variable manufacturing overhead 5 Total fixed costs $56,000 Variable selling and administrative 3 Total variable cost per unit $25 The product sells for $60 per unit. Production and sales data for July and August, the first two months of operations, follow: Units produced Units sold July 17,500 15,000 August 17,500 20,000 The company's Accounting Department has prepared absorption costing income statements for July and August as presented below: July August Sales $900,000 $1,200,000 Cost of goods sold 600,000 800,000 Gross margin 300,000 400,000 Selling and administrative expenses 290,000 305,000 Net operating income $10,000 $95,000 Required: Determine the unit product cost under: Absorption costing. Variable costing. Prepare contribution format variable costing income statements for July and August. Reconcile the variable costing and absorption costing net operating income figures. The company’s Accounting Department has determined the company’s break-even point to be 16,000 units per month, computed as follows: Fixed cost per month / Unit contribution margin = $560,000 / $35 per unit = 16,000 units 'I'm confused,' said the president. 'The accounting people say that our break-even point is 16,000 units per month, but we sold only 15,000 units in July, and the income statement they prepared shows a $10,000 profitt for that month. Either the income statement is wrong or the break-even point is wrong." Prepare a brief memo for the president, explaining what happened on the July income statement
Question 1:
Denton Company manufactures and sells a single product. Cost data for the product are given below:
|
Variable cost per unit: |
Fixed costs per month: |
|
|
|
Direct materials |
$7 |
Fixed manufacturing |
$315,000 |
|
Direct labor |
10 |
Fixed selling and administrative |
245,000 |
|
Variable manufacturing overhead |
5 |
Total fixed costs |
$56,000 |
|
Variable selling and administrative |
3 |
||
|
Total variable cost per unit |
$25 |
The product sells for $60 per unit. Production and sales data for July and August, the first two months of operations, follow:
|
Units produced |
Units sold |
|
|
July |
17,500 |
15,000 |
|
August |
17,500 |
20,000 |
The company's Accounting Department has prepared absorption costing income statements for July and August as presented below:
|
July |
August |
|
|
Sales |
$900,000 |
$1,200,000 |
|
Cost of goods sold |
600,000 |
800,000 |
|
Gross margin |
300,000 |
400,000 |
|
Selling and administrative expenses |
290,000 |
305,000 |
|
Net operating income |
$10,000 |
$95,000 |
Required:
- Determine the unit product cost under:
- Absorption costing.
- Variable costing.
- Prepare contribution format variable costing income statements for July and August.
- Reconcile the variable costing and absorption costing net operating income figures.
- The company’s Accounting Department has determined the company’s break-even point to be 16,000 units per month, computed as follows:
Fixed cost per month / Unit contribution margin =
$560,000 / $35 per unit = 16,000 units
'I'm confused,' said the president. 'The accounting people say that our break-even point is 16,000 units per month, but we sold only 15,000 units in July, and the income statement they prepared shows a $10,000 profitt for that month. Either the income statement is wrong or the break-even point is wrong." Prepare a brief memo for the president, explaining what happened on the July income statement.
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