Question

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	$29
Direct labor	$15
Variable manufacturing overhead	$6
Variable selling and administrative	$1
Fixed costs per year:
Fixed manufacturing overhead	$580,000
Fixed selling and administrative expenses	$120,000

During its first year of operations, O’Brien produced 92,000 units and sold 74,000 units. During its second year of operations, it produced 77,000 units and sold 90,000 units. In its third year, O’Brien produced 89,000 units and sold 84,000 units. The selling price of the company’s product is $79 per unit.

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.

	Unit Product Cost Year 1 Year 2 Year 3

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

	O’Brien Company Variable Costing Income Statement Year 1 Year 2 Year 3 Variable expenses: Total variable expenses 0 0 0 0 0 0 Fixed expenses: Total fixed expenses 0 0 0 $0 $0 $0

Answer 1

Requirement 1
a	Unit product cost under variable costing with FIFO is $50 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	92000	77000	89000
		Unit Sales	74000	90000	84000
		Sales Revenue	5846000	7110000	6636000	79
		Variable cost of goods manufactured
		Opening inventory	0	900000	250000
		Direct Materials	2668000	2233000	2581000	29
		Direct Labor	1380000	1155000	1335000	15
		Variable manufacturing overhead	552000	462000	534000	6
		Variable cost of goods available for sale	4600000	4750000	4700000	50
		Less : Closing Inventory	900000	250000	500000	50
		Cost of goods sold	3700000	4500000	4200000	50
		Gross Contribution Margin	2146000	2610000	2436000	29
		Less : Variable selling and administrative	74000	90000	84000	1
		Contribution Margin	2072000	2520000	2352000	28
		Fixed expenses
		Fixed manufacturing overhead	580000	580000	580000
		Fixed selling and administrative expenses	120000	120000	120000
		Total fixed expenses	700000	700000	700000
		Net Operating Income(Loss)	1372000	1820000	1652000