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	$	13
Direct labor	$	5
Variable manufacturing overhead	$	1
Variable selling and administrative	$	1
Fixed costs per year:
Fixed manufacturing overhead	$	320,000
Fixed selling and administrative expenses	$	230,000

During the year, the company produced 32,000 units and sold 17,000 units. The selling price of the company’s product is $53 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	13
Direct labour	5
Variable manufacturing overhead	1
Fixed manufacturing overhead (320000/32000)	10
Unit product cost	29

Income statement

Sales (17000*53)	901000
Cost of goods sold	493000
Gross profit	408000
Selling and administrative expense	247000
Net operating income	161000

2. Assume that the company uses variable costing:

a. Compute the unit product cost.

Direct material	13
Direct labour	5
Variable manufacturing overhead	1
Unit product cost	19

Income statement

Sales (17000*53)		901000
Variable Cost of goods sold		323000
Manufacturing margin		578000
Variable selling and administrative expense		17000
Contribution margin		561000
Fixed cost
Fixed manufacturing overhead	320000
Fixed selling and administrative expense	230000	550000
Net operating income		11000