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 material	14
Direct labour	5
Variable manufacturing overhead	1
Fixed manufacturing overhead (264000/33000)	8
Unit product cost	28

Income statement

Sales (15000*52)	780000
Less: Cost of goods sold	420000
Gross profit	360000
Less: Selling and administrative expense	189000
Net operating income	171000

2. Assume that the company uses Variable costing:

a. Compute the unit product cost.

Direct material	14
Direct labour	5
Variable manufacturing overhead	1
Unit product cost	20

Income statement

Sales (15000*52)		780000
Less: Variable Cost of goods sold		300000
Manufacturing margin		480000
Less: Variable selling and administrative expense		15000
Contribution margin		465000
Less: Fixed cost
Manufacturing overhead	264000
Selling and administrative expense	174000	438000
Net operating income		27000