Question

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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	$	25
Direct labor	$	18
Variable manufacturing overhead	$	5
Variable selling and administrative	$	4
Fixed costs per year:
Fixed manufacturing overhead	$	520,000
Fixed selling and administrative expenses	$	180,000

During its first year of operations, O’Brien produced 90,000 units and sold 72,000 units. During its second year of operations, it produced 78,000 units and sold 91,000 units. In its third year, O’Brien produced 83,000 units and sold 78,000 units. The selling price of the company’s product is $75 per unit.

Required:

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 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.

3. Assume the company uses absorption 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.

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

Required: 1a Unit product cost Year 1 rear11 Year 2 Year 3 25 25 18 18 Direct material Direct labor Variable manufacturing overhead Variable costing unit product cost 48.00 48.00 48.00 Required: 1b O'Brien Company Variable Costing Income Statement 1 Year 1 5400000 Variable expenses: Variable cost of goods sold 3456000 Variable selling and administrative 288000 Year 2 6825000 Year 3 5850000 Sales 4368000 364000 3744000 312000 3744000 1656000 4732000 2093000 4056000 1794000 Total variable expenses Contribution margin Fixed expenses: Fixed manufacturing overhead Fixed selling and administrative 520000 180000 520000 180000 520000 180000 Total fixed expenses Net operating income 700000 956000 700000 1393000 700000 1094000

Required: 2a Unit product cost Year 1 Year 2 Year 3 25 18 Direct material Direct labor Variable manufacturing overhead Variable costing unit product cost 48.00 48.00 48.00 Required: 2b O'Brien Company Variable Costing Income Statement Year 1 5400000 Year 2 6825000 Year 3 5850000 Sales Variable expenses: Variable cost of goods sold Variable selling and administrative 3456000 288000 4368000 364000 3744000 312000 3744000 1656000 4732000 2093000 4056000 1794000 Total variable expenses Contribution margin Fixed expenses: Fixed manufacturing overhead Fixed selling and administrative 520000 180000 520000 180000 520000 180000 Total fixed expenses Net operating income 700000 956000 700000 1393000 700000 1094000

Required: 3a Unit product cost Year 1 Year 2 Direct material 25.000 25.00 Direct labor 18.00 18.00) Variable manufacturing overhead 5.00 5.00 Fixed manufacturing overhead 5.786 .67 Absorption costing unit product cost 53.78 54.67 Year 3 25.00 18.00 5.00 6.271 54.27 Required: 3b O'Brien Company Absorption Costing Income Statement Year 1 Year 2 Year 3 Sales 5400000 6825000 5850000 Cost of goods sold 38721604958950 4235060 Gross margin 1527840 18660501614940 Selling and administrative expenses 468000 544000 492000 Net Operating income 1059840 1322050 1122940

Required: 4a Direct material Direct labor Variable manufacturing overhead Fixed manufacturing overhead Absorption costing unit product cost Unit product cost Year 1 25.00 18.00 5.00 5.78 53.78 Year 2 25.00 18.00 5.00 6.67 54.67 Year 3 25.00 18.00 5.00 6.27 54.27 Required: 4b O'Brien Company Absorption Costing Income Statement Year 1 Sales 5400000.00 Cost of goods sold 3872160.001 Gross margin 1527840.00 Selling and administrative expenses 468000.00 Net Operating income 1059840.00 Year 2 6825000.00 4963400.00 1861600.00 544000.001 1317600.00 Year 3 5850000.00 4233060.00 1616940.00 492000.00 1124940.00