Question

O’Brien Company manufactures 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 $ 15 Variable manufacturing overhead $ 6 Variable selling and administrative $ 4 Fixed costs per year: Fixed manufacturing overhead $ 520,000 Fixed selling and administrative expenses $ 190,000 During its first year of operations, O’Brien produced 97,000 units and sold 72,000 units. During its second year of operations, it produced 81,000 units and sold 101,000 units. In its third year, O’Brien produced 84,000 units and sold 79,000 units. The selling price of the company’s product is $74 per unit. 2. Assume the company uses variable 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

Compute the Variable costing Unit Product cost
				Year-1	Year 2	Year 3
Direct Material			29	29	29
Direct labour			15	15	15
Variable Manufacturing overheads		6	6	6
Variable costing unit prroduct cost		50	50	50
Construct The Variable Costing Income Statement under LIFO
				YEAR 1	YEAR 2	Year 3
Sales				53,28,000	74,74,000	58,46,000
Less: Variable cost
variable cost of goods sold		3600000	5050000	3950000
Variable selling expense			2,88,000	4,04,000	3,16,000
Total Variable cost			38,88,000	54,54,000	42,66,000
Contribution margin			14,40,000	20,20,000	15,80,000
Fixed expense:
Fixed Manufacturing overheads		5,20,000	5,20,000	5,20,000
Fixed selling expense			1,90,000	1,90,000	1,90,000
Total Fixed cost			7,10,000	7,10,000	7,10,000
Net operating Income			7,30,000	13,10,000	8,70,000