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 operations, 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:

Required:
1. Determine the unit product cost under:
a. Absorption costing.
b. Variable costing.
2. Prepare variable costing income statements for May and June using the contribution approach.
3. Reconcile the variable costing and absorption costing net operating income figures.
4. The company's Accounting Department has determined the break-even point to be 28,000 units per month, computed as follows:

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 incomestatement.

Transcribed Image Text:

Sales. Cost of goods sold $1.040,000 $1,360,000 Beginning inventory Add cost of goods manufactured.. Goods available for sale. Less ending inventory..120,000 120,000 900,000 900,000 1,020,000 900,000 Cost of goods sold. Gross margin Selling and administrative expenses.. Net operating income. 780,000 1,020,000 340,000 282,000 $ 2,000 58,000 260,000 258,000 th $420,00028.000 units Fixed cost per month Unit contribution margin $15 per unit