Denton Company manufactures and sells a single product. Cost data for the product are given below:
Variable costs per unit:
Direct materials . . . . . . . . . . . . . . . . . . . . . . . . $ 7
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Variable manufacturing overhead . . . . . . . . . . 5
Variable selling and administrative . . . . . . . . . 3
Total variable cost per unit . . . . . . . . . . . . . . . $ 25
Fixed costs per month:
Fixed manufacturing overhead . . . . . . . . . . . . $ 315,000
Fixed selling and administrative . . . . . . . . . . . 245,000
Total fixed cost per month . . . . . . . . . . . . . . . $ 560,000
The product sells for $ 60 per unit. Production and sales data for July and August, the first two months of operations, follow:

The company€™s Accounting Department has prepared absorption costing income statements for July and August as presented below:

Required:
1. Determine the unit product cost under:
a. Absorption costing.
b. Variable costing.
2. Prepare contribution format variable costing income statements for July and August.
3. Reconcile the variable costing and absorption costing net operating income figures.
4. The company€™s Accounting Department has determined the company€™s break-even point to be 16,000 units per month, computed as follows:

€œI€™m confused,€ said the president. €œThe 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 profit 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 absorption costing incomestatement.

Transcribed Image Text:

Units Units Produced Sold July August... 17,500 15,000 17,500 20,000 July August Sales Cost of goods sold... 600,000 800,000 Gross margin..300,000 Selling and administrative expenses . 290,000 305.000 Net operating incomen. 10,000 95,000 400,000 Fixed cost per month$560,000 Unit contribution margin $35 per unit = 16,000 units