The Maxwell Corporation manufacturers and sells a single product. Cost date for the product is as follows:
Item/Costs
Variable cost per unit
Direct materials $ 6
Direct labor 12
Variable factory overhead 4
Variable selling & administrative 3
Total Variable cost per unit $ 25
Fixed cost 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 are as follows:
Month
Units Produced/
Units Sold
May 30,000 /26,000
June 30,000 /34,000
Income statements for the months of May and June prepared by the accounting department using absorption are as follows:
Item May/June
Sales $1,040,000/$1,360,000
Cost of goods sold 780,000 /1,020,000
Gross margin $ 260,000/$ 340,000
Selling & administrative expenses 258,000 / 282,000
Net Operating Income $ 2,000 /$ 58,000
Required:
1. Determine the unit product cost under: (a) Absorption Costing (b) Variable costing.
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2. Prepare contribution format variable costing income statements for May and June.
3. Reconcile the variable costing and absorption net operating incomes.
4. The Company’s Accounting Department has determined the break-even point to be 28,000 units as follows:
Fixed cost per month = $420,000 = 28,000 units Unit contribution margin $15 per unit
After receiving this 28,000 unit break-even number, Maxwell’s President stated:”something is wrong somewhere, Our Chief Accountant says that our break-even point is 28,000 units. However, in May we sold only 26,000 units and the May income statement indicates we made a profit of $2000. Which figure do we believe?”
Prepare a brief explanation of what happened on the May income statement.