Problem 7-18 Variable and Absorption Costing Unit Product Costs and Income Statements [LO7-1, LO7-2]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$20Direct labor$12Variable manufacturing overhead$7Variable selling and administrative$3Fixed costs per year: Fixed manufacturing overhead$110,000Fixed selling and administrative expenses$50,000 During its first year of operations, Haas produced 40,000 units and sold 40,000 units. During its second year of operations, it produced 55,000 units and sold 30,000 units. In its third year, Haas produced 20,000 units and sold 45,000 units. The selling price of the company’s product is $46 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.

Answer and  Explanation:

As per the data given in the question,

a)

For computation of contribution margin per unit first we need to find out the contribution margin per unit and fixed expenses which is shown below:-

Contribution margin per unit = Selling price per unit - Variable cost per unit

= $46 - ($20 + $12 + $7 + $3)

= $46 - $42

= $4

Fixed expenses = Fixed manufacturing overhead + Fixed selling and administrative expenses

= $110,000 + $50,000

= $160,000

Break-even units = Fixed expenses ÷ Contribution margin per unit

= $160,000 ÷ 4

= 40,000  units

2. a The Computation of unit product cost is shown below:-

Particulars              Year 1                    Year 2              Year 3

Unit product cost :

Direct material      $20                       $20                        $20

Direct labor         $12                          $12                          $12

Variable manufacturing

overhead             $7                          $7                               $7

Unit product cost $39                       $39                           $39

b. The preparation of Income statement is shown below:-

                                  Income statement

                                     Haas Company

Particulars Per unit           Year 1           Year 2             Year 3

Sales unit                           40,000         30,000            45,000

Sales           $46                $1,840,000   $1,380,000   $2,070,000

Less:

Variable cost :

Variable manufacturing

cost             $39              $1,560,000    $1,170,000     $1,755,000

Variable selling and

administrative cost $3    $120,000       $90,000       $135,000

Total variable cost $42   $1,680,000    $1,260,000   $1,890,000

Contribution margin $4   $160,000       $120,000     $180,000

Fixed expenses :

Fixed Manufacturing

overhead                          $110,000           $110,000          $110,000

Fixed selling and

administrative expense   $50,000             $50,000          $50,000

Net Operating Income    $0                       -$40,000          $20,000

3. a. The computation of unit product cost for Year 1, Year 2, and Year 3 is shown below:-

Particulars                   Year 1                     Year 2             Year 3

Produced units          40,000                    55,000            20,000

Unit Product Cost:

Direct material            $20                        $20                    $20

Direct labor                $12                          $12                     $12

Variable manufacturing

overhead                    $7                          $7                            $7

Fixed manufacturing

overhead                    $2.75                    $2                             $5.5

($110,000 ÷ Number of unit produced)

Total cost of produced unit$41.75$41                             $44.5

3. b The Preparation of income statement for Year 1, Year 2, and Year 3 is attached in the spreadsheet.