# Managerial Accounting: P7-14 Linden Company manufactures and sells a single product

Managerial Accounting Problem 7-14 Prepare & Reconcile Variable Costing Statements
Linden Company manufactures and sells a single product. Cost data for the product follow:
Variable costs per unit:
Direct materials 6.00
Direct labor 12.00
Total variable costs per unit \$25.00

Fixed costs per month:
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 month 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:
May June
Sales 1,040,000 1,360,000
Cost of goods sold
Beginning inventory - 120,000
Add cost of goods manufactured 900,000 900,000
Goods available for sale 900,000 1,020,000
Less ending inventory 120,000 -
Cost of goods sold 780,000 1,020,000
Gross margin 260,000 340,000
Selling & administrative expenses 258,000 282,000
Operating income \$2,000.00 \$58,000.00

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:
Fixed cost per month/Unit contribution margin = \$420,000/\$15 per unit = 28,000 units
Upon receiving this figure, the president commented, "There's something peculiar here. The controller says that the break-even point is 28,000 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 income statement.