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 $ 28 Direct labor $ 17 Variable manufacturing overhead $ 3 Variable selling and administrative $ 4 Fixed costs per year: Fixed manufacturing overhead $ 500,000 Fixed selling and administrative expenses $ 130,000 During its first year of operations, O’Brien produced 93,000 units and sold 73,000 units. During its second year of operations, it produced 80,000 units and sold 95,000 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 $73 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

Solution :

Computation of Unit Product Cost (Variable Costing)
Particulars	Year 1	Year 2	Year 3
Direct material	$28.00	$28.00	$28.00
Direct labor	$17.00	$17.00	$17.00
Variable Manufacturing overhead	$3.00	$3.00	$3.00
Unit Product Cost	$48.00	$48.00	$48.00
Unit Produced	93000	80000	89000
Cost of Goods Produced	$4,464,000.00	$3,840,000.00	$4,272,000.00
Unit Sold	73000	95000	84000
Cost of Goods Sold Year 1 = 73000*48 Year 2 = (80000*48)+(15000*48) Year 3 = 84000*48	$3,504,000.00	$4,560,000.00	$4,032,000.00
Ending inventory	20000	5000	10000
Value of ending inventory (Opening inventory + Cost of Goods Produced - Cost of goods Sold)	$960,000.00	$240,000.00	$480,000.00

Income Statement (Variable Costing)
Particulars	Year 1	Year 2	Year 3
Sales	$5,329,000.00	$6,935,000.00	$6,132,000.00
Variable Cost:
Variable manufacturing cost	$3,504,000.00	$4,560,000.00	$4,032,000.00
Variable Selling & Adminstrative Expenses	$292,000.00	$380,000.00	$336,000.00
Contribution	$1,533,000.00	$1,995,000.00	$1,764,000.00
Fixed manufacturing overhead	$500,000.00	$500,000.00	$500,000.00
Fixed Selling & Administrative Expenses	$130,000.00	$130,000.00	$130,000.00
Net Operating income	$903,000.00	$1,365,000.00	$1,134,000.00