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	$	15
Direct labor	$	5
Variable manufacturing overhead	$	1
Variable selling and administrative	$	1
Fixed costs per year:
Fixed manufacturing overhead	$	286,000
Fixed selling and administrative expenses	$	196,000

During the year, the company produced 26,000 units and sold 22,000 units. The selling price of the company’s product is $46 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.

Answer 1

a.

Computation of Unit Product Cost
	Absorption Costing
Direct Meterial	$                         15.00
Direct Labour	$                            5.00
Variable Manufactoring Overhead	$                            1.00
Fixed Manufactoring Overhead ($286,000/26,000)	$                         11.00
Unit Product Cost	$                         32.00

Selling and administrative expenses (both variable and fixed) are not relevant for the computation of unit product cost.

b.

Income Statement
Absorption Costing
Sales (22,000*$46)		1,012,000
Less: Cost of Goods Sold (22,000*$32)		704,000
Gross Margin		308,000
Less: Selling and administrative expense
Variable (22,000*$1)	22,000
Fixed	196,000
Total selling and administrative expense		218,000
Net income		90,000