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.

2. Assume that the company uses variable costing:

a. Compute the unit product cost.

b. Prepare an income statement for the year.

Answer 1

a.

Computation of Unit Product Cost
	Variable Costing
Direct Meterial	$                         15
Direct Labour	$                            5
Variable Manufactoring Overhead ($31,000/51,000)	$                            1
Unit Product Cost	$                         21

Notice that the fixed manufacturing overhead cost has not been included while computing the cost of one unit under variable costing system.

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

b.

Income Statement
Variable Costing
Sales (22,000*$46)		$ 1,012,000
Less: Variable Expenses:
Variable manufacturing Cost (($15+5+1)*22,000)	$ 462,000
Variable selling and administrative expense ($1*22,000)	$    22,000
Total Variable Expenses		$     484,000
Contribution Margin		$     528,000
Fixed Expenses:
Fixed manufacturing overhead	$ 286,000
Fixed selling and administrative	$ 196,000
Total Fixed Expenses		$     482,000
Net Operating Income		$        46,000