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		$      13
Direct labor		$       7
Variable manufacturing overhead		$       1
Variable selling and administrative		$       1
Fixed costs per year:
Fixed manufacturing overhead	$ 288,000
Fixed selling and administrative	$ 198,000

During the year, the company produced 24,000 units and sold 20,000 units. The selling price of the company’s product is $48 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.

	Lynch Company Absorption Costing Income Statement Sales Cost of goods sold Contribution Margin Advertising Net operating income

2. Assume that the company uses variable costing:   

a. Compute the unit product cost.

Unit Product Cost: ____

Prepare Income Statement

	Lynch Company Variable Costing Income Statement Variable expenses: Fixed expenses:

Answer 1

Answer to Requirement 1.

Part a.
Unit Product Cost as per Absorption Costing = Direct Materials + Direct Labor + Variable Manufacturing Overhead + Fixed Manufacturing Overhead
Fixed Manufacturing Overhead = 288,000 / 24,000
Fixed Manufacturing Overhead = $12

Unit Product Cost as per Absorption Costing = $13 + $7 + $1 + $12
Unit Product Cost as per Absorption Costing = $33

Part b.

Answer to Requirement 2.

Part a.
Unit Product Cost as per Variable Costing = Direct Materials + Direct Labor + Variable Manufacturing Overhead
Unit Product Cost as per Variable Costing = $13 + $7 + $1
Unit Product Cost as per Variable Costing = $21

Part b.