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 $ 300,000 $ 190,000 During the year, the company produced 25,000 units and sold 20,000 units. The selling price of the company's product is $50 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

1a
Direct materials	6
Direct labor	9
Variable manufacturing overhead	3
Fixed manufacturing overhead	12		=300000/25000
Unit product cost	30
b
Absorption Costing Income Statement
Sales	1000000		=20000*50
Cost of goods sold	600000		=20000*30
Gross margin	400000
Selling and administrative expenses	270000		=190000+(20000*4)
Net operating income	130000
2a
Direct materials	6
Direct labor	9
Variable manufacturing overhead	3
Unit product cost	18
b
Variable Costing Income Statement
Sales		1000000	=20000*50
Variable expenses:
Variable Cost of goods sold	360000		=20000*18
Variable Selling and administrative expenses	80000		=20000*4
		440000
Contribution margin		560000
Fixed expenses:
Fixed manufacturing overhead	300000
Fixed Selling and administrative expenses	190000
		490000
Net operating income		70000