Question

ATTENTION: ALL COMPONENTS / QUESTIONS MUST BE FULLY ANSWERED -- DO NOT USE THE TEXTBOOK SOLUTIONS ALREADY IN PLACE

IF YOU ARE UNABLE TO ANSWER ALL COMPONENTS, PLEASE DO NOT ANSWER. THANK YOU! :)

O’Brien Company manufactures and sells one product. The following information pertains to each of the company’s first three years of operations:

Variable costs per unit:
Manufacturing:
Direct materials . . . . . . . . . . . . . . . . . . . . . . . . $ 32
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20
Variable manufacturing overhead . . . . . . . . . . $ 4
Variable selling and administrative . . . . . . . . . $ 3
Fixed costs per year:
Fixed manufacturing overhead . . . . . . . . . . . . $ 660,000
Fixed selling and administrative expenses . . . $ 120,000
During its first year of operations, O’Brien produced 100,000 units and sold 80,000 units. During its second year of operations, it produced 75,000 units and sold 90,000 units. In its third year, O’Brien produced 80,000 units and sold 75,000 units. The selling price of the company’s product is $ 75 per unit.

Required: (ALL COMPONENTS OF ALL 4 QUESTIONS MUST BE ANSWERED -- DO NOT USE THE TEXTBOOK SOLUTIONS ALREADY FOUND IN THIS BOOK)

1. Assume the company uses variable costing and a FIFO inventory flow assumption (FIFO means first-in first-out. In other words, it assumes that the oldest units in inventory are sold first):
a. Compute the unit product cost for Year 1, Year 2, and Year 3.
b. Prepare an income statement for Year 1, Year 2, and Year 3.

2. Assume the company uses variable costing and a LIFO inventory flow assumption (LIFO meanslast-in first-out. In other words, it assumes that the newest units in inventory are sold first):
a. Compute the unit product cost for Year 1, Year 2, and Year 3.
b. Prepare an income statement for Year 1, Year 2, and Year 3.

3. Assume the company uses absorption costing and a FIFO inventory flow assumption (FIFO meansfirst-in first-out. In other words, it assumes that the oldest units in inventory are sold first):

a. Compute the unit product cost for Year 1, Year 2, and Year 3.

b. Prepare an income statement for Year 1, Year 2, and Year 3.

4. Assume the company uses absorption costing and a LIFO inventory flow assumption (LIFO means last-in first-out. In other words, it assumes that the newest units in inventory are sold first):
a. Compute the unit product cost for Year 1, Year 2, and Year 3.
b. Prepare an income statement for Year 1, Year 2, and Year 3.

Answer 1

	Requirement 1
	a	Unit product cost under variable costing with FIFO is $56 for all the three years
	b		O' Brian Company
			Variable costing Income statement with FIFO
				Year 1	Year 2	Year 3	Per unit
			Unit produced	100000	75000	80000
			Unit Sales	80000	90000	75000
			Sales Revenue	6000000	6750000	5625000	75
			Variable cost of goods manufactured
			Opening inventory	0	1120000	280000
			Direct Materials	3200000	2400000	2560000	32
			Direct Labor	2000000	1500000	1600000	20
			Variable manufacturing overhead	400000	300000	320000	4
			Variable cost of goods available for sale	5600000	5320000	4760000	56
			Less : Closing Inventory	1120000	280000	560000	56
			Cost of goods sold	4480000	5040000	4200000	56
			Gross Contribution Margin	1520000	1710000	1425000	19
			Less : Variable selling and administrative	240000	270000	225000	3
			Contribution Margin	1280000	1440000	1200000	16
			Fixed expenses				90000
			Fixed manufacturing overhead	660000	660000	660000
			Fixed selling and administrative expenses	120000	120000	120000
			Total fixed expenses	780000	780000	780000
			Net Operating Income(Loss)	500000	660000	420000
	Requirement 2
	a	Unit product cost under variable costing with LIFO is $56 for all the three years
	b		O' Brian Company
			Variable costing Income statement with LIFO
				Year 1	Year 2	Year 3	Per unit
			Unit produced	100000	75000	80000
			Unit Sales	80000	90000	75000
			Sales Revenue	6000000	6750000	5625000	75
			Variable cost of goods manufactured
			Opening inventory	0	1120000	280000
			Direct Materials	3200000	2400000	2560000	32
			Direct Labor	2000000	1500000	1600000	20
			Variable manufacturing overhead	400000	300000	320000	4
			Variable cost of goods available for sale	5600000	5320000	4760000	56
			Less : Closing Inventory	1120000	280000	560000	56
			Cost of goods sold	4480000	5040000	4200000	56
			Gross Contribution Margin	1520000	1710000	1425000	19
			Less : Variable selling and administrative	240000	270000	225000	3
			Contribution Margin	1280000	1440000	1200000	16
			Fixed expenses
			Fixed manufacturing overhead	660000	660000	660000
			Fixed selling and administrative expenses	120000	120000	120000
			Total fixed expenses	780000	780000	780000
			Net Operating Income(Loss)	500000	660000	420000
	Requirement 3
	a	The unit product cost under absorption costing with FIFO is
				Year 1	Year 2	Year 3
			Variable manufacturing cost	5600000	4200000	4480000
			Fixed manufacturing overhead	660000	660000	660000
			Total cost of production	6260000	4860000	5140000
			Divide by production unit	100000	75000	80000
			Unit product cost	62.6	64.8	64.25
	b		O' Brian Company
			Absorption costing Income statement with FIFO
				Year 1	Year 2	Year 3
			Unit produced	100000	75000	80000
			Unit Sales	80000	90000	75000
			Sales Revenue	6000000	6750000	5625000
			Variable cost of goods manufactured
			Opening inventory	0	1252000	324000
			Direct Materials	3200000	2400000	2560000
			Direct Labor	2000000	1500000	1600000
			Variable manufacturing overhead	400000	300000	320000
			Fixed manufacturing overhead	660000	660000	660000
			Cost of goods available for sale	6260000	6112000	5464000
			Less : Closing Inventory	1252000	324000	642500
			Cost of goods sold	5008000	5788000	4821500
			Gross Profit	992000	962000	803500
			Variable selling and administrative	240000	270000	225000
			Fixed selling and administrative expenses	120000	120000	120000
			Total Selling and administrative	360000	390000	345000
			Net Operating Income(Loss)	632000	572000	458500
	Requirement 4
	a	The unit product cost under absorption costing with LIFO is
				Year 1	Year 2	Year 3
			Variable manufacturing cost	5600000	4200000	4480000
			Fixed manufacturing overhead	660000	660000	660000
			Total cost of production	6260000	4860000	5140000
			Divide by production unit	100000	75000	80000
			Unit product cost	62.6	64.8	64.25
	b		O' Brian Company
			Absorption costing Income statement with LIFO
				Year 1	Year 2	Year 3
			Unit produced	100000	75000	80000
			Unit Sales	80000	90000	75000
			Sales Revenue	6000000	6750000	5625000
			Variable cost of goods manufactured
			Opening inventory	0	1252000	313000
			Direct Materials	3200000	2400000	2560000
			Direct Labor	2000000	1500000	1600000
			Variable manufacturing overhead	400000	300000	320000
			Fixed manufacturing overhead	660000	660000	660000
			Cost of goods available for sale	6260000	6112000	5453000
			Less : Closing Inventory	1252000	313000	634250
			Cost of goods sold	5008000	5799000	4818750
			Gross Profit	992000	951000	806250
			Variable selling and administrative	240000	270000	225000
			Fixed selling and administrative expenses	120000	120000	120000
			Total Selling and administrative	360000	390000	345000
			Net Operating Income(Loss)	632000	561000	461250