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 $ 30 Direct labor $ 16 Variable manufacturing overhead $ 4 Variable selling and administrative $ 2 Fixed costs per year: Fixed manufacturing overhead $ 550,000 Fixed selling and administrative expenses $ 140,000 During its first year of operations, O’Brien produced 97,000 units and sold 70,000 units. During its second year of operations, it produced 80,000 units and sold 102,000 units. In its third year, O’Brien produced 86,000 units and sold 81,000 units. The selling price of the company’s product is $79 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

Calculation of Per unit Costs
Particulars	Year 1	Year 2	Year 3
Variable Cost
Direct Materials	30.00	30.00	30.00
Direct Labour	16.00	16.00	16.00
Variable Manufacturing Overhead	4.00	4.00	4.00
Variable Selling Overhead	2.00	2.00	2.00
Fixed Cost	7.11	8.63	8.02
Total cost per unit	59.11	60.63	60.02
Working Note:
Total Fixed Cost	6,90,000.00	6,90,000.00	6,90,000.00
Units Produced	97,000.00	80,000.00	86,000.00
Fixed Cost per unit	7.11	8.63	8.02
Income Statements
Particulars	Year 1	Year 2	Year 3
Sales	55,30,000.00	80,58,000.00	63,99,000.00
Less: Variable Cost	50,44,000.00	41,60,000.00	44,72,000.00
Less: Fixed Cost	6,90,000.00	6,90,000.00	6,90,000.00
Profit	-2,04,000.00	32,08,000.00	12,37,000.00
Working Note:
Opening Stock	-	27,000.00	5,000.00
Units Produced	97,000.00	80,000.00	86,000.00
Units Sold	70,000.00	1,02,000.00	81,000.00
Closing Stock	27,000.00	5,000.00	10,000.00