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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	$	27
Direct labor	$	15
Variable manufacturing overhead	$	5
Variable selling and administrative	$	3
Fixed costs per year:
Fixed manufacturing overhead	$	600,000
Fixed selling and administrative expenses	$	170,000

During its first year of operations, O’Brien produced 97,000 units and sold 73,000 units. During its second year of operations, it produced 79,000 units and sold 98,000 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.

3. 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):

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

	Year 1	Year 2	Year 3
Material	$                27.00	$                27.00	$                27.00
Labour	$                15.00	$                15.00	$                15.00
Variable Overhead	$                   5.00	$                   5.00	$                   5.00
Fixed Over Head*	$                   6.19	$                   7.59	$                   6.74
Unit product cost	$                53.19	$                54.59	$                53.74

Workings:

	Year 1	Year 2	Year 3
Fixed overhead	$            600,000	$            600,000	$            600,000
No. of Units Produced	97,000	79,000	89,000
	6.19	7.59	6.74

Income Statement Year 1 Year 2 Year 3 Sales $        5,329,000 $        7,154,000 $        6,132,000 Less:Cost of Goods Sold $        3,882,870 $        5,316,220 $        4,518,410 Contribution Margin $        1,446,130 $        1,837,780 $        1,613,590 Less: Selling and administrative(Sale Units*3+170000) $            389,000 $            464,000 $            422,000 Operating Profit $        1,057,130 $        1,373,780 $        1,191,590

The Calculations are shown separately in the Workings.

Workings:

Sales Value
	Year 1	Year 2	Year 3
Units Sold	73,000	98,000	84,000
Sale Price per Unit	$                      73	$                      73	$                      73
	$ 5,329,000.00	$ 7,154,000.00	$ 6,132,000.00

Ending Inventory
Beginning Inventory Units	-	24,000	5,000
Produced	97,000	79,000	89,000
Sold	73,000	98,000	84,000
Ending Inventory	24,000	5,000	10,000

Cost of Goods Sold Year 1 Year 2 Year 3 Beginning Inventory $                       -   $        1,276,560 $            272,950 Produced $        5,159,430 $        4,312,610 $        4,782,860 Ending inventory $        1,276,560 $            272,950 $            537,400 Cost of Goods Sold $        3,882,870 $        5,316,220 $        4,518,410

You can also include Cost of goods Sold workings in The Income Statement.

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