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	$	12
Direct labor	$	7
Variable manufacturing overhead	$	2
Variable selling and administrative	$	2
Fixed costs per year:
Fixed manufacturing overhead	$	248,000
Fixed selling and administrative expenses	$	158,000

During the year, the company produced 31,000 units and sold 21,000 units. The selling price of the company’s product is $44 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.

	Absorption costing
Direct material	12
Direct labour	7
Variable manufacturing overhead	2
Fixed manufacturing overhead (248000/31000)	8
Unit product cost	29

b. Prepare an income statement for the year.

Sales	924000
Cost of goods sold	(609000)
Gross profit	315000
Less selling and administrative exp	(200000)
Net operating income	115000

2. Assume that the company uses variable costing:

a. Compute the unit product cost

Variable costing
Direct material	12
Direct labour	7
Variable manufacturing overhead	2
Unit product cost	21

b. Prepare an income statement for the year

Sales	924000
Less: Variable cost of goods sold (5500*50)	(441000)
Less: Variable selling and administrative exp	(42000)
Contribution margin	441000
Less: Fixed manufacturing overhead	(248000)
Less: Fixed selling and administrative expense	(158000)
Net operating income	35000