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	$	11
Direct labor	$	5
Variable manufacturing overhead	$	2
Variable selling and administrative	$	2
Fixed costs per year:
Fixed manufacturing overhead	$	264,000
Fixed selling and administrative	$	174,000

During the year, the company produced 22,000 units and sold 18,000 units. The selling price of the company’s product is $45 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.

Prepare an income statement for the year. Assume that the company uses variable costing

	Lynch Company Variable Costing Income Statement

Answer 1

Direct material	11			Direct material	11
Direct Labor	5			Direct Labor	5
Variable Manufacturing Overhead	2			Variable Manufacturing Overhead	2
Unit Product cost	18			Fixed manufacturing overhead	12
				Unit Product cost	30
Variable Costing Income Statement				absorption Costing Income Statement
Sales		810000		Sales		810000
Less: Variable Expenses				Beginning Invenotry	0
Beginning Invenotry	0			Add: Cost of goods manufactured	660000
Add: Cost of goods manufactured	396000			Goods available for sale	660000
Goods available for sale	396000			Less: Ending Inventory	120000	540000
Less: Ending Inventory	72000	324000		Gross Profit		270000
Variable cost of goods sold		486000		Selling and administrative cost	210000	210000
Variable selling and administrative cost	36000			Net operating income		60000
Contribution Margin		522000
Less: Fixed Expenses
Manufacturing Overhead	264000
Selling and administrative	174000	438000
Net operating income		84000