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 $ 4

Variable manufacturing overhead $ 1

Variable selling and administrative $ 1

Fixed costs per year:

Fixed manufacturing overhead $ 308,000

Fixed selling and administrative $ 218,000

During the year, the company produced 28,000 units and sold 24,000 units. The selling price of the company’s product is $41 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 1-a

	Per Unit
Unit product cost as per absorption costing	$             27.00

Working

Unit product cost as per absorption costing
	Per Unit
Direct material	$             11.00
Direct labor	$                4.00
Variable manufacturing overhead	$                1.00
Fixed manufacturing overhead	$             11.00
Unit product cost as per absorption costing	$             27.00

Requirement 1-b

Absorption costing income statement
Sales	$   984,000.00
Cost of goods sold	$   648,000.00
Gross profit	$   336,000.00
Operating expenses
Selling and administrative expenses	$   242,000.00
Net income	$     94,000.00

Requirement 2-a

Unit product cost as per Variable costing

$             16.00

Working

	Per Unit
Direct material	$             11.00
Direct labor	$                4.00
Variable manufacturing overhead	$                1.00
Unit product cost as per Variable costing	$             16.00

.Requirement 2-b

Lynch Company
Variable Costing Income Statement
Sales		$        984,000.00
Less: Variable Cost
Direct material	$   264,000.00
Direct labor	$     96,000.00
Variable manufacturing overhead	$     24,000.00
Variable Selling expenses	$     24,000.00
Total variable cost		$        408,000.00
Contribution Margin		$        576,000.00
Fixed costs:
Fixed manufacturing Overheads	$   308,000.00
Fixed selling & administrative expenses	$   218,000.00
Total fixed cost		$        526,000.00
Income from operations		$          50,000.00