Question

Lynch Company manufactures and sells a single product. The following costs were incurred during the company’s first year of operations:

Variable costs per unit:
Manufacturing:
Direct materials	$	10
Direct labor	$	5
Variable manufacturing overhead	$	1
Variable selling and administrative	$	1
Fixed costs per year:
Fixed manufacturing overhead	$	385,000
Fixed selling and administrative	$	295,000

During the year, the company produced 35,000 units and sold 17,000 units. The selling price of the company’s product is $58 per unit.

Required:

1. Assume that the company uses absorption costing:

a. Compute the unit product cost.

b. Prepare an income statement for the year.

2. Assume that the company uses variable costing:

a. Compute the unit product cost.

b. Prepare an income statement for the year.

Answer 1

Answer 1-a.

Unit Product Cost = Direct Materials + Direct Labor + Variable Manufacturing Overhead + Fixed Manufacturing Overhead
Unit Product Cost = $10 + $5 + $1 + $385,000/35,000
Unit Product Cost = $27.00

Answer 1-b.

Sales = Selling Price per unit * Units Sold
Sales = $58.00 * 17,000
Sales = $986,000

Cost of Goods Sold = Unit Product Cost * Units Sold
Cost of Goods Sold = $27 * 17,000
Cost of Goods Sold = $459,000

Selling and Administrative Expenses = Variable Selling and Administrative Expenses per unit * Units Sold + Fixed Selling and Administrative Expenses
Selling and Administrative Expenses = $1 * 17,000 + $295,000
Selling and Administrative Expenses = $312,000

Answer 2-a.

Unit Product Cost = Direct Materials + Direct Labor + Variable Manufacturing Overhead
Unit Product Cost = $10 + $5 + $1
Unit Product Cost = $16.00

Answer 2-b.

Sales = Selling Price per unit * Units Sold
Sales = $58.00 * 17,000
Sales = $986,000

Variable Cost of Goods Sold = Unit Product Cost * Units Sold
Variable Cost of Goods Sold = $16 * 17,000
Variable Cost of Goods Sold = $272,000

Variable Selling and Administrative Expenses = Variable Selling and Administrative Expenses per unit * Units Sold
Variable Selling and Administrative Expenses = $1 * 17,000
Variable Selling and Administrative Expenses = $17,000