Question

Inner Secret T Shirt Company produces and sells one product. The following information pertains to each of the company’s first three years of operations: Variable costs per unit: Manufacturing: Direct materials $ 29 Direct labor $ 14 Variable manufacturing overhead $ 4 Variable selling and administrative $ 1 Fixed costs per year:

Fixed manufacturing overhead $ 570,000

Fixed selling and administrative expenses $ 170,000

During its first year of operations, O’Brien produced 92,000 units and sold 75,000 units.

During its second year of operations, it produced 84,000 units and sold 96,000 units.

In its third year, O’Brien produced 89,000 units and sold 84,000 units.

The selling price of the company’s product is $79 per unit.

4. Assume the company uses absorption costing and a LIFO inventory flow assumption (LIFO means last-in first-out. In other words, it assumes that the newest units in inventory are sold first):

a. Compute the unit product cost for Year 1, Year 2, and Year 3.

b. Prepare an income statement for Year 1, Year 2, and Year 3.

Answer 1

(a).

	Year 1	Year 2	Year 3
Direct materials	$2668000	$2436000	$2581000
Direct labor	$1288000	$1176000	$1246000
Variable manufacturing overhead	$368000	$336000	$356000
Fixed manufacturing overhead	$570000	$570000	$570000
Total manufacturing costs	$4894000	$4518000	$4753000
Number of units produced	92000	84000	89000
Unit product cost	$53.19	$53.78	$53.40

(b).

Note: Actual answer may differ due to decimal point calculation, but I have calculated upto 2 decimal points.

Income Statement
	Year 1	Year 2	Year 3
Number of units sold	75000	96000	84000
Sale price per unit	$79	$79	$79
Sales (Units * Sale price)	$5925000	$7584000	$6636000
Less: Manufacturing costs	($3989250)	($5156280)	($4485600)
Gross margin	$1935750	$2427720	$2150400
Less: Variable selling and administrative expenses ($1 per unit)	($75000)	($96000)	($84000)
Less: Fixed selling and administrative expenses	($170000)	($170000)	($170000)
Net income	$1690750	$2161720	$1896400

Working Note;

1. Manufacturing cost for year 2 will be calculated as follow;

(84000 * $53.78) + (12000 * $53.19) = $5156280