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	$29
Direct labor	$16
Variable manufacturing overhead	$6
Variable selling and administrative	$2
Fixed costs per year:
Fixed manufacturing overhead	$580,000
Fixed selling and administrative expenses	$180,000

During its first year of operations, O’Brien produced 98,000 units and sold 76,000 units. During its second year of operations, it produced 76,000 units and sold 93,000 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 $78 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.

	Unit Product Cost Year 1 Year 2 Year 3

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

	O’Brien Company Variable Costing Income Statement Year 1 Year 2 Year 3 Variable expenses: Total variable expenses Fixed expenses: Total fixed expenses

Answer 1

a) Product cost per unit under variable costing:-

Year 1 Year 2 Year 3

Direct Material 29.00 29.00 29.00

Direct labour 16.00 16.00 16.00

Variable manufacturing overhead 06.00 06.00 06.00

Fixed Manufacturing ovehead 5.92 07.63 06.74

$ 56.92 $ 58.63 $ 57.74

		Year 1		Year 2		Year 3
Unit sold		76,000.00		93,000.00		81,000.00
Sale price/unit		78.00		78.00		78.00
Sale		59,28,000.00		72,54,000.00		63,18,000.00
Less : Variable Expense
Direct Material	(29*76000)	22,04,000.00	(29*93000)	26,97,000.00	(29*81000)	23,49,000.00
Direct Labour	(16*76000)	12,16,000.00	(16*93000)	14,88,000.00	(16*81000)	12,96,000.00
Variable Manufacturing Overhead	(6*76000)	4,56,000.00	(6*93000)	5,58,000.00	(6*81000)	4,86,000.00
Variable selling and adminstrative	(2*76000)	1,52,000.00	(2*93000)	1,86,000.00	(2*81000)	1,62,000.00
Total variable cost		40,28,000.00		49,29,000.00		42,93,000.00
Contribution Margin		19,00,000.00		23,25,000.00		20,25,000.00
Less : Fixed Ovehead
Manufacturing Overhead		5,80,000.00		5,80,000.00		5,80,000.00
Selling and distribution Overhead		1,80,000.00		1,80,000.00		1,80,000.00
Total Fixed Ovehead		7,60,000.00		7,60,000.00		7,60,000.00
Net Operating Income		11,40,000.00		15,65,000.00		12,65,000.00