EXERCISE 7-9 (20 MINUTES)

4. The unit product cost at a production level of 420,000 units would be

calculated as follows:

Direct materials ... $57.20

Direct labor ... 15.00

Variable manufacturing overhead ... 5.00

Fixed manufacturing overhead ($6,888,000 ÷ 420,000 units).. 16.40

Unit product cost ... $93.60

The absorption costing income statement would be:

Sales (400,000 units × $120 per unit) ... $48,000,000

Cost of goods sold:

Beginning inventory... $ 0

Add cost of goods manufactured

(420,000 units × $93.60 per unit) ... 39,312,000

Goods available for sale ... 39,312,000

Less ending inventory

(20,000 units × $93.60 per unit)... 1,872,000 37,440,000

Gross margin... 10,560,000

Less selling and administrative expenses:

Variable selling and administrative

(400,000 units × $10 per unit)... 4,000,000

Fixed selling and administrative ... 4,560,000 8,560,000

Net operating income... $ 2,000,000

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Solutions Manual, Chapter 7 389

Case 7-19 (continued)