Question

Lynch Company manufactures and sells a single product. The following costs were incurred during the company’s first year of operations:

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	$	11
Direct labor	$	5
Variable manufacturing overhead	$	2
Variable selling and administrative	$	2
Fixed costs per year:
Fixed manufacturing overhead	$	350,000
Fixed selling and administrative	$	260,000

During the year, the company produced 35,000 units and sold 25,000 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.

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.	Unit product cost:
	Direct Material		$               11
	Direct Labor		$                  5
	Variable Manufacturing overhead		$                  2
	Total Variable Cost		$               18
	Fixed Manufacturing overhead ($350000/35000)		$               10
	Unit product cost		$               28
b.	Absorption Costing Income Statement
	Sales(25000 X $46)		$ 11,50,000
Less:	Cost of Goods Sold
	Beginning Inventory	0
Add:	Cost of Goods manufactured (35000 X $28)	$   9,80,000
	Goods available for sale	$   9,80,000
Less:	Ending Inventory (10000 X $28)	$   2,80,000	$   7,00,000
	Gross Margin		$   4,50,000
Less:	Selling and Administrative expenses [(25000 X $2) + $260000]		$   3,10,000
	Net Operating Income		$   1,40,000
2	Under Variable Costing
a.	Unit product cost:
	Direct Material		$               11
	Direct Labor		$                  5
	Variable Manufacturing overhead		$                  2
	Unit product cost		$               18
b.	Variable Costing Income Statement
	Sales(25000 X $46)		$ 11,50,000
Less:	Variable expenses:
	Variable Cost of goods sold:
	Beginning Inventory	0
Add:	Variable Manufacturing Cost(35000 X $18)	$   6,30,000
	Goods available for sale	$   6,30,000
Less:	Ending Inventory (10000 X $18)	$   1,80,000
	Variable Cost of goods sold	$   4,50,000
Add:	Variable selling expenses (25000 X $2)	$       50,000	$   5,00,000
	Contribution margin		$   6,50,000
Less:	Fixed Expenses:
	Fixed Manufacturing overhead	$   3,50,000
	Fixed Selling and Administrative expenses	$   2,60,000	$   6,10,000
	Net operating Income		$       40,000