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	$	11
Direct labor	$	8
Variable manufacturing overhead	$	1
Variable selling and administrative	$	1
Fixed costs per year:
Fixed manufacturing overhead	$	420,000
Fixed selling and administrative	$	330,000

During the year, the company produced 30,000 units and sold 25,000 units. The selling price of the company’s product is $54 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

1a) Unit product cost

Direct material	11
Direct labor	8
Variable manufacturing overhead	1
Fixed manufacturing overhead (420000/30000)	14
Unit product cost	34

1b) Income statement

Sales (25000*54)	1350000
Cost of goods sold (25000*34)	850000
Gross profit	500000
Selling and administrative expense	355000
Operating income	145000

2a) Unit product cost

Direct material	11
Direct labor	8
Variable manufacturing overhead	1
Unit product cost	20

2b) Income statement

Sales (25000*54)		1350000
Variable Cost of goods sold (25000*20)		500000
Manufacturing margin		850000
Variable selling and administrative expense		25000
Contribution margin		825000
Fixed cost
Fixed manufacturing overhead	420000
Fixed Selling and administrative expense	330000
Total Fixed cost		750000
Operating income		75000