Chuck Wagon Grills, Inc., makes a single product-a handmade specialty barbecue grill that it...

Question:

Chuck Wagon Grills, Inc., makes a single product-a handmade specialty barbecue grill that it sells for $300. Data for last year's operations follow:

Units in beginning inventory 0

Units produced 10,300

Units sold 8,700

Units in ending inventory 1,600

Variable costs per unit:

Direct materials $ 60

Direct labor 40

Variable manufacturing overhead 10

Variable selling and administrative 30

Total variable cost per unit $ 140

Fixed costs:

Fixed manufacturing overhead $ 220,000

Fixed selling and administrative 900,000

Total fixed costs $ 1,120,000

Required:

1. Assume that the company uses variable costing. Compute the unit product cost for one barbecue grill.

2. Assume that the company uses variable costing. Prepare a contribution format income statement for the year.

3. What is the company's break-even point in terms of the number of barbecue grills sold?

Variable Costing:

Variable costing includes the cost related to the production units. The variable costing reflects the cost that increases or decreases on the basis of production. The variable cost is deducted from the sales, and after that, the company earned the contribution margin.

Answer and Explanation:

1. Calculation for the unit product cost:

{eq}\begin{align*} & = {\rm{Direct }}\;{\rm{material}} + {\rm{Direct Labor}} + {\rm{Variable}}\;{\rm{Overhead}} + {\rm{Variable}}\;{\rm{selling}}\;{\rm{and}}\,{\rm{administrative}}\;{\rm{expenses}}\\ & = 60 + 40 + 10 + 30\\ & = 140 \end{align*} {/eq}

2. Income statement in contribution format:

Particular Amount
Sales 2610000
Less: Direct material (18000)
Less: Direct labor (12000)
Less: Variable manufacturing overhead (3000)
Less: variable Selling and administrative expenses (9000)
Contribution margin 2568000
Less: Fixed Manufacturing Overhead 220000
Less: Fixed Selling and administrative expenses 900000
Net operating Income 1448000

Working note:

Calculation for the following:

{eq}\begin{align*} &{\rm{Sales}} = {\rm{Sales}}\;{\rm{units}} \times {\rm{Sales}}\;{\rm{Cost}}\\ &{\rm{Direct }}\;{\rm{material = Sales}}\;{\rm{units}} \times {\rm{Direct}}\;{\rm{material}}\;{\rm{Cost}}\\ &{\rm{Direct Labor = Sales}} \times {\rm{Direct Labor}}\;{\rm{Cost}}\\ &{\rm{Variable}}\;{\rm{Overehad}} = {\rm{Sales}} \times {\rm{Variable}}\;{\rm{Overehad}}\,{\rm{Cost}}\\ &{\rm{Variable}}\;{\rm{selling}}\;{\rm{and}}\,{\rm{administrative}}\;{\rm{expenses}} = {\rm{Sales}} \times {\rm{Variable}}\;{\rm{selling}}\;{\rm{and}}\,{\rm{administrative}}\;{\rm{expenses}}\,{\rm{Cost}} \end{align*} {/eq}

3. Calculation for break-even points:

{eq}\begin{align*} &= \dfrac{{{\rm{Total}}\;{\rm{fixed}}\;{\rm{cost}}}}{{{\rm{Contribution}}\;{\rm{margine}}\;{\rm{unit}}\;{\rm{cost}}}}\\ & = \dfrac{{1120000}}{{140}}\\ & = 8000 \end{align*} {/eq}


Learn more about this topic:

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Variable Costing: Method, Formula & Advantages

from Financial Accounting: Help and Review

Chapter 13 / Lesson 5
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