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 $ 8 Variable manufacturing overhead $ 2 Variable selling and administrative $ 2 Fixed costs per year: Fixed manufacturing overhead $ 250,000 Fixed selling and administrative expenses $ 160,000 During the year, the company produced 25,000 units and sold 21,000 units. The selling price of the company’s product is $47 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

1a.

Cost per unit	Absorption costing
Direct material cost	$                               14
Direct Labour	$                                 8
Variable manufacturing overhead	$                                 2
Fixed manufacturing overhead ($250,000/25,000)	$                               10
Cost per unit	$                               34

1b.

Lynch Company
Income Statement (Absorption Costing)
Sales (21,000*$47)		$ 987,000
Cost of goods sold (21,000*$34)		$ 714,000
Gross margin		$ 273,000
Selling and administrative expenses
Variable (21,000*$2)	$    42,000
Fixed	$ 160,000
Total Selling and administrative expenses		$ 202,000
net operating income (Loss)		$    71,000

2a

Cost per unit	Variable costing
Direct material cost	$                            14
Direct Labour	$                              8
Variable manufacturing overhead	$                              2
Cost per unit	$                            24

2b.

Lynch Company
Income Statement (Variable costing)
Sales (21,000*$47)		$ 987,000
Variable Expenses
Direct Material (21,000*$14)	$ 294,000
Direct Labour (21,000*$8)	$ 168,000
Variable manufacturing overhead (21,000*$2)	$    42,000
Variable selling and administrative expenses (21,000*$2)	$    42,000
Total Variable cost		$ 546,000
Contribution margin		$ 441,000
Fixed Expenses
Fixed manufacturing overhead	$ 250,000
Fixed selling and administrative expense	$ 160,000
Total Fixed Expenses		$ 410,000
net operating income (Loss)		$    31,000

You can reach me over comment box if you have any doubts. Please rate this answer