The Maxwell Corporation manufacturers and sells a single product. Cost date for the product is as follows:

Item/Costs

Variable cost per unit     

Direct materials $   6    

Direct labor     12    

Variable factory overhead     4    

Variable selling & administrative     3

Total Variable cost per unit $ 25

Fixed cost 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 are as follows:

Month

Units Produced/

Units Sold

May 30,000 /26,000

June 30,000 /34,000

Income statements for the months of May and June prepared by the accounting department using absorption are as follows:

Item May/June

Sales $1,040,000/$1,360,000

Cost of goods sold      780,000 /1,020,000

Gross margin $   260,000/$ 340,000

Selling & administrative expenses       258,000  / 282,000

Net Operating Income $        2,000 /$ 58,000  

Required:

1. Determine the unit product cost under: (a) Absorption Costing (b)   Variable costing.

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2. Prepare contribution format variable costing income statements for May and June.

3. Reconcile the variable costing and absorption net operating incomes.

4. The Company’s Accounting Department has determined the break-even point to be 28,000 units as follows:

   Fixed cost per month         = $420,000       = 28,000 units                                  Unit contribution margin        $15 per unit    

After receiving this 28,000 unit break-even number, Maxwell’s President stated:”something is wrong somewhere, Our Chief Accountant says that our break-even point is 28,000 units. However, in May we sold only 26,000 units and the May income statement indicates we made a profit of $2000. Which figure do we believe?”

Prepare a brief explanation of what happened on the May income statement.