Question

Lynch Company manufactures and sells a single product. The following costs were incurred during the company’s first year of operations:

Variable costs per unit:
Manufacturing:
Direct materials	$	10
Direct labor	$	7
Variable manufacturing overhead	$	3
Variable selling and administrative	$	3
Fixed costs per year:
Fixed manufacturing overhead	$	380,000
Fixed selling and administrative expenses	$	290,000

During the year, the company produced 38,000 units and sold 18,000 units. The selling price of the company’s product is $61 per unit.

Required:

1. Assume that the company uses absorption costing:

a. Compute the unit product cost.

b. Prepare an income statement for the year.

2. Assume that the company uses variable costing:

a. Compute the unit product cost.

b. Prepare an income statement for the year.

Answer 1

1. Assume that the company uses absorption costing:

a. Compute the unit product cost.

Direct material	10
Direct labour	7
Variable manufacturing overhead	3
Fixed manufacturing overhead	10
Unit product cost	30

b. Prepare an income statement for the year.

Sales (18000*61)	1098000
Cost of goods sold (18000*30)	(540000)
Gross profit	558000
Selling and administrative expense (18000*3+290000)	(344000)
Net operating income	214000

2. Assume that the company uses Variable costing:

a. Compute the unit product cost.

Direct material	10
Direct labour	7
Variable manufacturing overhead	3
Unit product cost	20

b. Prepare an income statement for the year.

Sales (18000*61)	1098000
Variable Cost of goods sold (18000*20)	(360000)
Variable selling and administrative expense (18000*3)	(54000)
Contribution margin	684000
Fixed manufacturing overhead	(380000)
Fixed Selling and administrative expense	(290000)
Net operating income	14000