Question

Ogilvy Company manufactures and sells one product. The following information pertains to each of the company’s first three years of operations: Variable cost per unit: Direct materials $ 31 Fixed costs per year: Direct labor $ 1,800,000 Fixed manufacturing overhead $ 850,000 Fixed selling and administrative expenses $ 296,000 The company does not incur any variable manufacturing overhead costs or variable selling and administrative expenses. During its first year of operations, Ogilvy produced 75,000 units and sold 75,000 units. During its second year of operations, it produced 75,000 units and sold 70,200 units. In its third year, Ogilvy produced 75,000 units and sold 79,800 units. The selling price of the company’s product is $71 per unit. Required: 1. Assume the company uses super-variable costing: 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. 2. Assume the company uses a variable costing system that assigns $24 of direct labor cost to each unit produced: 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. 3. Reconcile the difference between the super-variable costing and variable costing net operating incomes in Years 1, 2, and 3.

Answer 1

1	Super Variable costing	Year 1	Year 2	Year 3
	Direct material	31	31	31
	Units manufactured	75000	75000	75000
	Units sold	75,000	70,200	79,800
	Income statement
	Sales revenue	5325000	4984200	5665800
Less	Variable expense	2325000	2176200	2473800
	Contribution margin	3000000	2808000	3192000
Less	Fixed cost
	Direct labor	1800000	1800000	1800000
	Fixed manufacturing overheads	850000	850000	850000
	Fixed selling and administrative expense	296000	296000	296000
	Total fixed expenses	2946000	2946000	2946000
	Net operating income	54000	-138000	246000
2	Variable costing	Year 1	Year 2	Year 3
	Direct material	31	31	31
	Direct Labor	24	24	24
	Product cost	55	55	55
	Units manufactured	75000	75000	75000
	Units sold	75,000	70,200	79,800
	Income statement
	Sales revenue	5325000	4984200	5665800
Less	Variable expense
	Variable product cost	4125000	3861000	4389000
	Total variable expense	4125000	3861000	4389000
	Contribution margin	1200000	1123200	1276800
Less	Fixed cost
	Fixed manufacturing overheads	850000	850000	850000
	Fixed selling and administrative expense	296000	296000	296000
	Total fixed expenses	1146000	1146000	1146000
	Net operating income	54000	-22800	130800
3	Reconciliation
	Net operating income variable costing	54000	-22800	130800
Add	Ending inventory Fixed manufacturing (24*4800)	0	-115200	115200
	Net operating income supre variable costing	54000	-138000	246000