Question

Required information Case 4-29 (Algo) Variable and Absorption Costing Unit Product Costs and Income Statements (L04-1, LO4-2] [The following information applies to the questions displayed below.) 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 Direct labor Variable manufacturing overhead Variable selling and administrative Fixed costs per year: Fixed manufacturing overhead Fixed selling and administrative expenses Nunc $590,000 $120,000 During its first year of operations, O'Brien produced 93,000 units and sold 76,000 units. During its second year of operations, it produced 81,000 units and sold 93,000 units. In its third year, O'Brien produced 86,000 units and sold 81,000 units. The selling price of the company's product is $71 per unit. Case 4-29 (Algo) Part-1 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.

Answer 1

Required: 1a Unit product cost Year 1 Year 2 Year 3 25 25 15 Direct material Direct labor Variable manufacturing overhead Variable costing unit product cost 45.00 45.00 45.00 Required: 1b O'Brien Company Variable Costing Income Statement Year 1 Sales 5396000 Variable expenses: Variable cost of goods sold 3420000 Variable selling and administrative 152000 Year 2 6603000 Year 3 5751000 4185000 186000 3645000 162000 3572000 1824000 4371000 2232000 3807000 1944000 Total variable expenses Contribution margin Fixed expenses: Fixed manufacturing overhead Fixed selling and administrative 590000 120000 590000 120000 590000 120000 Total fixed expenses Net operating income 710000 1114000 710000 1522000 710000 1234000