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	$26
Direct labor	$16
Variable manufacturing overhead	$3
Variable selling and administrative	$1
Fixed costs per year:
Fixed manufacturing overhead	$510,000
Fixed selling and administrative expenses	$120,000

During its first year of operations, O’Brien produced 97,000 units and sold 80,000 units. During its second year of operations, it produced 84,000 units and sold 96,000 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 $75 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

	Unit Product Cost Year 1 Year 2 Year 3

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

	O’Brien Company Variable Costing Income Statement Year 1 Year 2 Year 3 Variable expenses: Total variable expenses 0 0 0 0 0 0 Fixed expenses: Total fixed expenses 0 0 0 $0 $0 $0

c. 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):

d Compute the unit product cost for Year 1, Year 2, and Year 3. (Round your intermediate calculations and final answers to 2 decimal places.)

	Unit Product Cost Year 1 Year 2 Year 3

e Prepare an income statement for Year 1, Year 2, and Year 3. (Round your intermediate calculations to 2 decimal places.)

	O’Brien Company Absorption Costing Income Statement Year 1 Year 2 Year 3 0 0 0 $0 $0 $0

Answer 1

Variable Costing LIFO
Unit Product cost:
			Year1	Year2	Year3
Material cost per unit			26	26	26
labour cost per unit			16	16	16
Variabble Mfg OH per unit			3	3	3
Unit product cost			45	45	45
Income Statement under Absorption Costing:
			Year1	YEar2	Year3
Sales revenue			6000000	7200000	5775000
Less: Variable expenses
Cost of goods sold @ 45			3600000	4320000	3465000
Selling and admin expense			80000	96000	77000
Total variable cost			3680000	4416000	3542000
Contribution Margin			2320000	2784000	2233000
Less: Fixed cost
Fixed Mfg Overheads			510000	510000	510000
Fixed selling and admin Oh			120000	120000	120000
Total Fixed cost			630000	630000	630000
Net income			1690000	2154000	1603000
Absorption costing
Unit Product cost:
			Year1	Year2	Year3
Material cost per unit			26	26	26
labour cost per unit			16	16	16
Variabble Mfg OH per unit			3	3	3
Fixed Mfg OH per unit			5.26	6.07	6.22
			(510000/97000)	(510000/84000)	(510000/82000)
Unit product cost			50.26	51.07	51.22
Income Statement under Absorption Costing:
			Year1	YEar2	Year3
Sales revenue			6000000	7200000	5775000
Less: Cost of goods sold
Year1 (80000*50.26)			4020800
Year2(17000*50.26+79000*51.07)				4888950
Year3 (5000*51.07+72000*51.22)					3943190
Gross Margin			1979200	2311050	1831810
Less: Selling and admin expense			200000	216000	197000
Net income			1779200	2095050	1634810