PROBLEM 5-17

Nickelson Company

Variable and Absorption Costing Unit Product Costs and Income Statements

P5-17 Nickleson

Company manufactures and sells one product. The following information pertains

to each of the company’s first three years of operation:

Variable

costs per unit:

Manufacturing:

Direct

materials ……………………………………. $ 25 Direct labor

…………………………………………… $16

Variable

manufacturing overhead ………………$5

Variable

selling and administrative………………..$2

Fixed costs

per year:

Fixed

manufacturing overhead…………………….. $ 300, 000

Fixed

selling and administrative expenses……. $ 180, 000

During its

first year of operations Nickelson produced 60, 000 units and sold 60,000

units.

During its

second year of operations it produced 75, 000 units and sold 50,000 units. In

its third year, Nickelson produced 40, 000 units and sold 65, 000 units. The

selling price of the company’s product is $ 56 per unit.

REQUIRED:

1. Compute the company’s break-even-point in units sold.

2. Assume

the company uses variable costing:

a. Compute

the unit product cost for year 1, year 2, and year 3.

b. Prepare

an Income statement for year 1, year, 2, and year 3.

3. Assume

the company uses absorption costing:

a. Compute

the unit product cost for year 1, year 2, and year 3.

b. Prepare an

income statement for year 1, year 2, and year 3.

4. Compare

the net operating income figures that you computed in requirements 2 and 3 to

the break-even point that you computed in requirement 1 . Which net operating

income figure seem counterintuitive? Why?

PROBLEM 5-17

Nickelson Company

Variable and Absorption Costing Unit Product Costs and Income Statements

P5-17 Nickleson

Company manufactures and sells one product. The following information pertains

to each of the company’s first three years of operation:

Variable

costs per unit:

Manufacturing:

Direct

materials ……………………………………. $ 25 Direct labor

…………………………………………… $16

Variable

manufacturing overhead ………………$5

Variable

selling and administrative………………..$2

Fixed costs

per year:

Fixed

manufacturing overhead…………………….. $ 300, 000

Fixed

selling and administrative expenses……. $ 180, 000

During its

first year of operations Nickelson produced 60, 000 units and sold 60,000

units.

During its

second year of operations it produced 75, 000 units and sold 50,000 units. In

its third year, Nickelson produced 40, 000 units and sold 65, 000 units. The

selling price of the company’s product is $ 56 per unit.

REQUIRED:

1. Compute the company’s break-even-point in units sold.

2. Assume

the company uses variable costing:

a. Compute

the unit product cost for year 1, year 2, and year 3.

b. Prepare

an Income statement for year 1, year, 2, and year 3.

3. Assume

the company uses absorption costing:

a. Compute

the unit product cost for year 1, year 2, and year 3.

b. Prepare an

income statement for year 1, year 2, and year 3.

4. Compare

the net operating income figures that you computed in requirements 2 and 3 to

the break-even point that you computed in requirement 1 . Which net operating

income figure seem counterintuitive? Why?

PROBLEM 5-17

Nickelson Company

Variable and Absorption Costing Unit Product Costs and Income Statements

P5-17 Nickleson

Company manufactures and sells one product. The following information pertains

to each of the company’s first three years of operation:

Variable

costs per unit:

Manufacturing:

Direct

materials ……………………………………. $ 25 Direct labor

…………………………………………… $16

Variable

manufacturing overhead ………………$5

Variable

selling and administrative………………..$2

Fixed costs

per year:

Fixed

manufacturing overhead…………………….. $ 300, 000

Fixed

selling and administrative expenses……. $ 180, 000

During its

first year of operations Nickelson produced 60, 000 units and sold 60,000

units.

During its

second year of operations it produced 75, 000 units and sold 50,000 units. In

its third year, Nickelson produced 40, 000 units and sold 65, 000 units. The

selling price of the company’s product is $ 56 per unit.

REQUIRED:

1. Compute the company’s break-even-point in units sold.

2. Assume

the company uses variable costing:

a. Compute

the unit product cost for year 1, year 2, and year 3.

b. Prepare

an Income statement for year 1, year, 2, and year 3.

3. Assume

the company uses absorption costing:

a. Compute

the unit product cost for year 1, year 2, and year 3.

b. Prepare an

income statement for year 1, year 2, and year 3.

4. Compare

the net operating income figures that you computed in requirements 2 and 3 to

the break-even point that you computed in requirement 1 . Which net operating

income figure seem counterintuitive? Why?

PROBLEM 5-17

Nickelson Company

P5-17 Nickleson

Company manufactures and sells one product. The following information pertains

to each of the company’s first three years of operation:

Variable

costs per unit:

Manufacturing:

materials ……………………………………. $ 25 Direct labor

…………………………………………… $16

Variable

manufacturing overhead ………………$5

Variable

selling and administrative………………..$2

Fixed costs

per year:

Fixed

manufacturing overhead…………………….. $ 300, 000

Fixed

selling and administrative expenses……. $ 180, 000

During its

first year of operations Nickelson produced 60, 000 units and sold 60,000

units.

During its

second year of operations it produced 75, 000 units and sold 50,000 units. In

its third year, Nickelson produced 40, 000 units and sold 65, 000 units. The

selling price of the company’s product is $ 56 per unit.

REQUIRED:

1. Compute the company’s break-even-point in units sold.

2. Assume

the company uses variable costing:

a. Compute

the unit product cost for year 1, year 2, and year 3.

b. Prepare

an Income statement for year 1, year, 2, and year 3.

3. Assume

the company uses absorption costing:

a. Compute

the unit product cost for year 1, year 2, and year 3.

b. Prepare an

income statement for year 1, year 2, and year 3.

4. Compare

the net operating income figures that you computed in requirements 2 and 3 to

the break-even point that you computed in requirement 1 . Which net operating

income figure seem counterintuitive? Why?