Question

Ogilvy Company manufactures and sells one product. The following information pertains to each of the company’s first three years of operations:

Variable cost per unit:
Direct materials	$	25
Fixed costs per year:
Direct labor	$	1,242,000
Fixed manufacturing overhead	$	831,000
Fixed selling and administrative expenses	$	260,000

The company does not incur any variable manufacturing overhead costs or variable selling and administrative expenses. During its first year of operations, Ogilvy produced 69,000 units and sold 69,000 units. During its second year of operations, it produced 69,000 units and sold 65,400 units. In its third year, Ogilvy produced 69,000 units and sold 72,600 units. The selling price of the company’s product is $59 per unit.

Required:

1. Assume the company uses super-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.

2. Assume the company uses a variable costing system that assigns $18 of direct labor cost to each unit produced:

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. Reconcile the difference between the super-variable costing and variable costing net operating incomes in Years 1, 2, and 3.

Answer 1

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