P5-21 linden company manufactures and sells a single product. cost

 

P5-21 Linden Company manufactures and sells a single product. Cost data for the product follow:

 

 

 

Variable costs per unit:

 

Direct materials……………………………………………. $ 6

 

Direct labor …………………………………………………. 12

 

Variable factory overhead………………………….. 4

 

Variable selling and administrative…………….. 3

 

Total variable costs per unit……………………………………. $ 25

 

Fixed costs per month :

 

Fixed manufacturing overhead …………………….. $ 240, 000

 

Fixed selling and administrative ……………………. $ 180, 000

 

Total fixed cost per month ………………………………………. $ 420, 000

 

 

 

The product sells for $40 per unit. Production and sales data for May and June, the first two months of operation, are as follows:

 

 

 

Units Units       Produced Sold

 

May………………………       30, 000                        26, 000

 

June……………………..         30, 000                        34, 000

 

Income statements prepared by the accounting department, using absorption costing, are presented below:
May June

 

Sales………………………………………………………. $ 1, 040, 000 $ 1, 360, 000

 

Cost of goods sold…………………………………..780, 000 1, 020, 000

 

Gross  argin………………………………………….260, 000 340, 000

 

Selling and administrative expense………. 260, 000 282, 000

 

Net operating income…………………………… $2, 000 $ 58, 000

 

 

 

REQUIRED:
1. Determine the unit product cost under:

 

a. Absorption costing

 

b. Variable costing

 

2. Prepare contribution formal variable costing income statements for May and June.

 

3. Reconcile the variable costing and absorption costing net operating incomes.

 

4. The company’s Accounting Department has determined the break-even point to be 28,000 units per month, computed as follows:

 

 

 

Fixed cost per month = $ 420,000 = 28,000 units

 

Unit contribution margin  $ 15 per unit

 

Upon receiving this figure, the president commented. “There’s something peculiar here. The controller says that the break-even point is 28,000 units per month. Yet we sold only 26, 000 units in May, and the income statement we received showed a $ 2, 000 profit. Which figure do we believe?” Prepare a brief explanation of what happened on the May income statement.

 

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