Question

Lynch Company manufactures and sells a single product. The following costs were incurred during the company's first year of operations: kipped 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 eBook $385,000 $295,000 Hint Print References During the year, the company produced 35,000 units and sold 17,000 units. The selling price of the company's product is $58 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

a.	Under Absorption Costing
	Unit product cost:
	Direct Material		$                   10
	Direct Labor		$                     5
	Variable Manufacturing overhead		$                     1
	Total Variable Cost		$                   16
	Fixed Manufacturing overhead ($385000/35000)		$                   11
	Unit product cost		$                   27
b.	Absorption Costing Income Statement
	Sales(17000 X $58)		$       9,86,000
Less:	Cost of Goods Sold (17000 X $27)		$       4,59,000
	Gross Margin		$       5,27,000
Less:	Selling and Administrative expenses [(17000 X $1) + $295000]		$       3,12,000
	Net Operating Income		$       2,15,000
c.	Under Variable Costing
	Unit product cost:
	Direct Material		$                   10
	Direct Labor		$                     5
	Variable Manufacturing overhead		$                     1
	Unit product cost		$                   16
d.	Variable Costing Income Statement
	Sales(17000 X $58)		$       9,86,000
	Variable Cost of goods sold (17000 X $16)		$       2,72,000
	Manufacturing Margin		$       7,14,000
Add:	Variable selling expenses (17000 X $1)		$           17,000
	Contribution margin		$       6,97,000
Less:	Fixed Expenses:
	Fixed manufacturing overhead	$   3,85,000
	Fixed Selling and Administrative expenses	$   2,95,000	$       6,80,000
	Net operating Income		$           17,000