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	$	17
Variable manufacturing overhead	$	5
Variable selling and administrative	$	3
Fixed costs per year:
Fixed manufacturing overhead	$	580,000
Fixed selling and administrative expenses	$	190,000

During its first year of operations, O’Brien produced 91,000 units and sold 71,000 units. During its second year of operations, it produced 76,000 units and sold 91,000 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 $77 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.

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

Answer 1

Compute the Variable costing Unit Product cost
				Year 1	Year 2	Year 3
Direct Material				27	27	27
Direct labour				17	17	17
Variable Manufacturing overheads				5	5	5
Variable costing unit prroduct cost				49	49	49
Construct The Variable Costing Income Statement under LIFO
				YEAR 1		YEAR 2		Year 3
Sales					5,467,000		7,007,000		5,929,000
Less: Variable cost
variable cost of goods sold				3,479,000		4,459,000		3,773,000
Variable selling expense				213,000	3,692,000	273,000	4,732,000	231,000	4,004,000
Contribution margin					1,775,000		2,275,000		1,925,000
Fixed expense:
Fixed Manufacturing overheads					580,000		580,000		580,000
Fixed selling expense					190,000		190,000		190,000
Net operating Income					1,005,000		1,505,000		1,155,000