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Accounting: Absorption Income Statement

Below find production and sales information for Herrestad Company. We will use this same company for all the SLPs in this course.

Product information

Beginning inventory
0

Units produced
10,000

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Units sold
8,000

Selling price per unit
$300

Variable costs per unit

Direct material
120

Direct labor
60

Variable overhead
40

Variable selling and administrative
10

Fixed costs

Fixed manufacturing overhead
250,000

Fixed selling and administrative
100,000

Herrestad Company

Absorption Income Statement

For the period ending Dec. 31, 2011

Sales
$2,400,000

Cost of goods sold
1,960,000

Gross profit (margin)
$440,000

Selling and administrative expenses
180,000

Net income
$260,000

Prepare a contribution margin (behavioral, variable) income statement for Herrestad Company. Prepare a second version assuming the selling price per unit increases to $320 per unit.

Use the original information to:

Determine the number of units the company must sell to break even for the year?
Compute break even assuming direct materials cost increase from $120 to $140, but all information remains the same.

Solution Summary

This solution includes two prepared absorption costing income statements (when selling price increases). Calculations are provided for break even units with original information and as direct costs per unit increase. This solution is formatted in the attached Excel file.

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