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 Direct labor Variable manufacturing overhead Variable selling and administrative Fixed costs per year: Fixed manufacturing overhead Fixed selling and administrative 14 3 1 $290,000 $200,000 During the year, the company produced 29,000 units and sold 22,000 units. The selling price of the company's product is $42 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

Answer 1-a.

Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead
Unit product cost = $14 + $3 + $1 + $290,000/29,000
Unit product cost = $28

Answer 1-b.

Lynch Company Absorption Costing Income Statement Sales 924000 Less: Cost of Goods Sold 616000 Gross Profit 308000 Less: Selling and Administrative Expense 222000 Net Operating Income (loss) 86000

Sales = Selling price per unit * Units sold
Sales = $42 * 22,000
Sales = $924,000

Cost of goods sold = Unit product cost * Units sold
Cost of goods sold = $28 * 22,000
Cost of goods sold = $616,000

Selling and administrative expense = Variable selling and administrative expense per unit * Units sold + Fixed selling and administrative expense
Selling and administrative expense = $1 * 22,000 + $200,000
Selling and administrative expense = $222,000

Answer 2-a.

Unit product cost = Direct materials + Direct labor + Variable manufacturing overhead
Unit product cost = $14 + $3 + $1
Unit product cost = $18

Answer 2-b.

924000 Lynch Company Variable Costing Income Statement Sales Less: Variable Expenses Variable Cost of Goods Sold 396000 Variable Selling and Administrative 22000 Total Variable Expenses Contribution Margin Less: Fixed Expenses Fixed Manufacturing Overhead 290000 Fixed Selling and Administrative 200000 Total Fixed Expenses Net Operating Income (loss) 418000 506000 490000 16000

Sales = Selling price per unit * Units sold
Sales = $42 * 22,000
Sales = $924,000

Variable cost of goods sold = Unit product cost * Units sold
Variable cost of goods sold = $18 * 22,000
Variable cost of goods sold = $396,000

Variable selling and administrative expense = Variable selling and administrative expense per unit * Units sold
Variable selling and administrative expense = $1 * 22,000
Variable selling and administrative expense = $22,000