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	$	27
Direct labor	$	18
Variable manufacturing overhead	$	3
Variable selling and administrative	$	1
Fixed costs per year:
Fixed manufacturing overhead	$	540,000
Fixed selling and administrative expenses	$	190,000

During its first year of operations, O’Brien produced 99,000 units and sold 76,000 units. During its second year of operations, it produced 81,000 units and sold 99,000 units. In its third year, O’Brien produced 84,000 units and sold 79,000 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

1a.

	Year 1	Year 2	Year 3
Direct material	$    27	$    27	$    27
Direct labor	$    18	$    18	$    18
Variable manufacturing overhead	$      3	$ 3	$ 3
Product cost	$    48	$ 48	$ 48

1b

WALSH COMPANY

Income Statement (Variable costing)

	Year 1	Year 2	Year 3
Sales	5,396,000 [76,000*$71]	7,029,000 [99,000*$71]	5,609,000 [79,000*$71]
Less: Variable Expenses
Variable cost of goods sold	3,648,000 [76,000*$48]	4,752,000 [99,000*$48]	3,792,000 [79,000*$48]
Variable selling administrative expenses	76,000 [76,000*$1]	99,000 [99,000*$1]	79,000 [79,000*$1]
Total Variable expenses	3,724,000	4,851,000	3,871,000
Contribution margin	1,672,000	2,178,000	1,738,000
Fixed Expenses
Fixed Manufacturing overhead	540,000	540,000	540,000
Fixed selling and administrative expenses	190,000	190,000	190,000
Total Fixed Expenses	730,000	730,000	​​​​​​​730,000
net operating income (Loss)	942,000	1,448,000	​​​​​​​1,008,000