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		$ 10
Direct labor		$ 4
Variable manufacturing overhead		$ 1
Variable selling and administrative		$ 1
Fixed costs per year:
Fixed manufacturing overhead	$ 231,000
Fixed selling and administrative	$ 141,000

    

During the year, the company produced 21,000 units and sold 17,000 units. The selling price of the company’s product is $40 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

Requirement: la Lynch Company Calculation of Unit cost Under Absorption Costing Direct Material Direct Labor Variable Manufacturing Overhead Fixed Manufacturing Over head Unit Cost 10.00 4.00 1.00 11.00 26.00 Requirement: 1b Lynch Company Absorption costing Income Statement Sales Cost of Goods Sold Gross Margin Selling and Administrative Overheads Net Operating Income or loss 680000 442000 238000 158000 80000

Requirement: 2a Lynch Company Calculation of Unit cost Under Variable Costing Direct Material Direct Labor Variable Manufacturing Overhead Unit Cost 10.00 4.00 1.00 15.00 Requirement: 2b Lynch Company Variable Costing Income statement Sales (@40Per unit) Variable Expense: Variable cost of goods sold (@15) Variable Selling and Administrative Expense (@1) 680000 255000 17000 272000 408000 Total Varible Expenses Contribution Magin Fixed Expenses : Fixed manufacturing Overheads Fixed Selling and Administrative Expenses Total fixed Expenses Net Operating Income or loss 231000 141000 372000 36000