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 $ 30 Direct labor $ 15 Variable manufacturing overhead $ 4 Variable selling and administrative $ 2 Fixed costs per year: Fixed manufacturing overhead $ 510,000 Fixed selling and administrative expenses $ 140,000 During its first year of operations, O’Brien produced 98,000 units and sold 74,000 units. During its second year of operations, it produced 82,000 units and sold 101,000 units. In its third year, O’Brien produced 81,000 units and sold 76,000 units. The selling price of the company’s product is $73 per unit. 3. Assume the company uses absorption costing and a FIFO inventory flow assumption (FIFO means first-in first-out. In other words, it assumes that the oldest 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

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

	Year 1	Year 2	Year 3
Direct materials	$30	$30	$30
Direct labor	15	15	15
Variable manufacturing overhead	4	4	4
Fixed manufacturing overhead	(510000/98000)= 5.20	(510000/82000)= 6.22	(510000/81000)= 6.30
Unit product cost	$54.20	$55.22	$55.30

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

	Year 1	Year 2	Year 3
Sales	(74000*$73)= $5402000	(101000*$73)= $7373000	(76000*$73)= $5548000
Less: Cost of goods sold	(4010800)	(5552740)	(4202400)
Gross profit	1391200	1820260	1345600
Less: Selling and administrative expenses	(288000)	(342000)	(292000)
Net operating income	$1103200	$1478260	$1053600

Calculation of Cost of goods sold

Year 1= 74000*$54.20= $4010800

Year 2= 24000*$54.20+77000*$55.22= $5552740

Year 3= 5000*$55.22+71000*$55.30= $4202400

Calculation of Selling and administrative expenses

Selling and administrative expenses= Variable selling and administrative+Fixed selling and administrative

Year 1= ($2*74000)+$140000= $288000

Year 2= ($2*101000)+$140000= $342000

Year 3= ($2*76000)+$140000= $292000

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