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   $   26

Direct labor   $   18

Variable manufacturing overhead   $   5

Variable selling and administrative   $   1

Fixed costs per year:     

Fixed manufacturing overhead   $   540,000

Fixed selling and administrative expenses   $   100,000

During its first year of operations, O’Brien produced 94,000 units and sold 75,000 units. During its second year of operations, it produced 83,000 units and sold 97,000 units. In its third year, O’Brien produced 82,000 units and sold 77,000 units. The selling price of the company’s product is $80 per unit.

Required:

1. Assume the company uses variable 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

As the purchase price does not differ, the FIFO or LIFO method will not affect the unit cost of raw materials.