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	$	14
Direct labor	$	5
Variable manufacturing overhead	$	1
Variable selling and administrative	$	1
Fixed costs per year:
Fixed manufacturing overhead	$	264,000
Fixed selling and administrative	$	174,000

During the year, the company produced 33,000 units and sold 15,000 units. The selling price of the company’s product is $52 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

1. Assume that the company uses absorption costing:

a. Compute the unit product cost.

Direct materials	$   14.00
Direct labor	$    5.00
Variable manufacturing overhead	$    1.00
Fixed manufacturing overhead $264000/33000	$       8.00
Unit product cost	$    28.00

b. Prepare an income statement for the year.

Income Statement
Sales 15000*52	780000
Cost of Goods sold 15000*28	420000
Gross Margin	360000
Selling and Admin Expense (1*15000+174000)	189000
Net Operating Income	171000

2. Assume that the company uses variable costing:

a. Compute the unit product cost.

Direct materials	$   14.00
Direct labor	$    5.00
Variable manufacturing overhead	$    1.00
Unit product cost	$    20.00

b. Prepare an income statement for the year.

Income Statement
Sales		$ 780,000.00
Less Variable expenses
Variable cost of goods sold 15000*20	$ 300,000.00
Variable selling expense	$    15,000.00	$ 315,000.00
Contribution Margin		$ 465,000.00
Less fixed Expense
Fixed selling and Admin Expense	264000
Fixed Manufacturing Overhead	174000	$ 438,000.00
Net Operating income (loss)		$    27,000.00