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 | $ | 11 |
| Direct labor | $ | 8 |
| Variable manufacturing overhead | $ | 1 |
| Variable selling and administrative | $ | 1 |
| Fixed costs per year: | ||
| Fixed manufacturing overhead | $ | 420,000 |
| Fixed selling and administrative | $ | 330,000 |
During the year, the company produced 30,000 units and sold 25,000 units. The selling price of the company’s product is $54 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.
1a) Unit product cost
| Direct material | 11 |
| Direct labor | 8 |
| Variable manufacturing overhead | 1 |
| Fixed manufacturing overhead (420000/30000) | 14 |
| Unit product cost | 34 |
1b) Income statement
| Sales (25000*54) | 1350000 |
| Cost of goods sold (25000*34) | 850000 |
| Gross profit | 500000 |
| Selling and administrative expense | 355000 |
| Operating income | 145000 |
2a) Unit product cost
| Direct material | 11 |
| Direct labor | 8 |
| Variable manufacturing overhead | 1 |
| Unit product cost | 20 |
2b) Income statement
| Sales (25000*54) | 1350000 | |
| Variable Cost of goods sold (25000*20) | 500000 | |
| Manufacturing margin | 850000 | |
| Variable selling and administrative expense | 25000 | |
| Contribution margin | 825000 | |
| Fixed cost | ||
| Fixed manufacturing overhead | 420000 | |
| Fixed Selling and administrative expense | 330000 | |
| Total Fixed cost | 750000 | |
| Operating income | 75000 |
Lynch Company manufactures and sells a single product. The following costs were incurred during the company’s...