Question

Required information

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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	$	500,000
Fixed selling and administrative expenses	$	100,000

During its first year of operations, O’Brien produced 92,000 units and sold 76,000 units. During its second year of operations, it produced 76,000 units and sold 87,000 units. In its third year, O’Brien produced 83,000 units and sold 78,000 units. The selling price of the company’s product is $71 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

variable costing
1. unit product cost	YEAR 1	YEAR 2	YEAR 2
Direct materials	30.00	30.00	30.00
Direct labor	15.00	15.00	15.00
variable manufacturing overhead	4.00	4.00	4.00
Unit product cost	49.00	49.00	49.00
2. variable costing income statement
	YEAR 1	YEAR 2	YEAR 2
Sales = units sold * selling price (76000*71), (87000*71), (78000*71)	5,396,000.00	6,177,000.00	5,538,000.00
less: Variable expenses:
Variable Cost of goods sold: units sold * variable MOH unit price (76000*49) (87000*49) (78000*49)	3,724,000.00	4,263,000.00	3,822,000.00
Variable selling expenses = units sold * varibale selling and administraive price per unit (76000*2) (87000*2) (78000*2)	152,000.00	174,000.00	156,000.00
Contribution margin	1,520,000.00	1,740,000.00	1,560,000.00
less: Fixed Expenses:
Fixed Manufacturing overhead	500,000.00	500,000.00	500,000.00
Fixed Selling and Administrative expenses	100,000.00	100,000.00	100,000.00
Net operating Income	920,000.00	1,140,000.00	960,000.00